Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual
NPV:
Requirement-1:
To Calculate:
Payback period for the project
Answer to Problem 6BPSB
Payback period for the project is 1.9 years
Explanation of Solution
Payback period for the project is calculated as follows;
| Accumulated Cash Flows | ||
| Period 1 | $ 450,000 | $ 450,000 |
| Period 2 | $ 400,000 | $ 850,000 |
| Period 3 | $ 350,000 | $1,200,000 |
| Period 4 | $ 300,000 | $1,500,000 |
| Payback Period = 1 Year + (800000-450000)/400000 = | 1.9 Years |
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-2:
To Calculate:
Breakeven time for the investment
Answer to Problem 6BPSB
Breakeven time for the investment is 2.2 Years
Explanation of Solution
Breakeven time for the investment is calculated as follows:
| Cash Flows | PV of $1 (10%) | PV | Accumulated PV | |
| A | B | C=A*B | ||
| Period 1 | $ 450,000 | 0.9091 | $ 409,095.00 | $ 409,095.00 |
| Period 2 | $ 400,000 | 0.8264 | $ 330,560.00 | $ 739,655.00 |
| Period 3 | $ 350,000 | 0.7513 | $ 262,955.00 | $ 1,002,610.00 |
| Period 4 | $ 300,000 | 0.6830 | $ 204,900.00 | $ 1,207,510.00 |
| Breakeven Time = 2 Years +(800000-739655)/262955 = | 2.2 Years |
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-3:
To Calculate:
The Net Present Value of the investment
Answer to Problem 6BPSB
The Net Present Value of the investment is $407,510
Explanation of Solution
The Net Present Value of the investment is calculated as follows:
| Cash Flows | PV of $1 (10%) | PV | |
| A | B | C=A*B | |
| Period 1 | $ 450,000 | 0.9091 | $ 409,095 |
| Period 2 | $ 400,000 | 0.8264 | $ 330,560 |
| Period 3 | $ 350,000 | 0.7513 | $ 262,955 |
| Period 4 | $ 300,000 | 0.6830 | $ 204,900 |
| Total Present value | $1,207,510 | ||
| Less: Initial investment | $(800,000) | ||
| Net Present value | $ 407,510 |
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-4:
If the management should invest in the project
Answer to Problem 6BPSB
Yes, the management should invest in the project.
Explanation of Solution
The Net Present Value of the investment is calculated as follows:
| Cash Flows | PV of $1 (10%) | PV | |
| A | B | C=A*B | |
| Period 1 | $ 450,000 | 0.9091 | $ 409,095 |
| Period 2 | $ 400,000 | 0.8264 | $ 330,560 |
| Period 3 | $ 350,000 | 0.7513 | $ 262,955 |
| Period 4 | $ 300,000 | 0.6830 | $ 204,900 |
| Total Present value | $1,207,510 | ||
| Less: Initial investment | $(800,000) | ||
| Net Present value | $ 407,510 |
The Net Present Value of the investment is $407,510; hence the management should invest in the project.
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-5:
If the reason of differences in answers as compared with the previous situation
Answer to Problem 6BPSB
The reason of differences in answers as compared with the previous situation is the cash flow pattern.
Explanation of Solution
The reason of differences in answers as compared with the previous situation is the cash flow pattern. In the previous case, the higher cash flows are occurring in later years but in this situation the cash flows are higher in initial years of the project.
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Chapter 26 Solutions
Fundamental Accounting Principles
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