Chapter 26, Problem 6BPSB

To determine

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:

  $PaybackPeriod=\frac{InitialInvestment}{AnnualCash\inf low}$

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:

  $NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

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;

	Cash Flows	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

To determine

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:

  $PaybackPeriod=\frac{InitialInvestment}{AnnualCash\inf low}$

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:

  $NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

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

To determine

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:

  $PaybackPeriod=\frac{InitialInvestment}{AnnualCash\inf low}$

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:

  $NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

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

To determine

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:

  $PaybackPeriod=\frac{InitialInvestment}{AnnualCash\inf low}$

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:

  $NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

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.

To determine

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:

  $PaybackPeriod=\frac{InitialInvestment}{AnnualCash\inf low}$

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:

  $NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

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.