Question

Octavia Bakery is planning to purchase one of two ovens. The expected cash flows for each oven are shown below. MARR is 8%/ year. Model 127B Model 334A $50,000 $74,000 10 S Initial Investment Estimated Life End of Life Salvage Annual Income Annual Expense $11,000 $19,300 $10,500 $0 $27,000 $6,500 Click here to access the TVM Factor Table calculator. Part a Step 1 X] your answer is incorrect. Try again. What is the discounted payback period for Model 127B? : .....years Round entry to two decimal places. The tolerance is +0.02.

Answer 1

For finding a discounted payback period we need to find the present value of future revenue and then find Cumulative cash flow (CCF), we need to find the year in which CCF turns positive

We will use formula P = F/(1+i)^t to find the present value of future cash flows

Discounted payback period = Year bef CCF turns positive + (Absolute value of CCF bef it turns positive/Present value of cash flow in the year in which CCF turns positive)

using excel

Year	Investment	Annual revenue	Annual Cost	Salvage value	Net cash flow	Present value of Net Cash Flow	CCF
0	-50000				-50000	-50000	-50000
1		19300	-10500		8800	8148.15	-41851.85
2		19300	-10500		8800	7544.58	-34307.27
3		19300	-10500		8800	6985.72	-27321.55
4		19300	-10500		8800	6468.26	-20853.28
5		19300	-10500		8800	5989.13	-14864.15
6		19300	-10500		8800	5545.49	-9318.66
7		19300	-10500		8800	5134.72	-4183.94
8		19300	-10500		8800	4754.37	570.42
9		19300	-10500		8800	4402.19	4972.61
10		19300	-10500	11000	19800	9171.23	14143.84

Discounted Payback period = 7 + 4183.94 / 4754.37

= 7 + 0.88

= 7.88 yrs