Question

EXERCISE 7-1 Payback Method L07-1 The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow $15,000 $8,000 1. 2 3. 4 5 6 7 8 $1,000 $2,000 $2,500 $4,000 $5,000 $6,000 $5,000 $4,000 $3,000 $2,000 9 10.. Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as large? EXERCISE 7-2 Net Present Value Analysis L07-2 The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 12%.

Answer 1

note - sorry for not clicking quality image, ( camera error) but second one is perfect.

Total Investment = $15,000+ $8,000 - $23,000 Year Cash Inflow Cumulative Inflow $1000 $1600 $ 2,000 $ 3000 of 5 3 $2,500 S G ។ 8 $ 4,000 $ 5,000 $ 6,000 & 5,000 $ 4,000 $ 3,00 $ 2, ono $ 5,500 $9,500 $14,500 $20,500 $ 25,500 $99.500 $ 39,500 $ 34,500 9 10 (A-1) Payback period А where, (A-1) + Cost - Cumulative cash flow Cash flow А A year in which cumulative cash flows from Investment exceed the initial Cost. year prior to A Cash flowA Net cash flow in Year A Cumulative cash flow' A-1 = Cumulative cash flows from Investment at the end of year (A-1) A-1 Initial Investment Cost

Payback period 6 + [I $ 43, Peo $ 90, Spo $ S, Sop + 0.5 6. 5 талх

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wave as No, Payback period would not be affected if the cash inflow in the last year senyal times large, because Payback period take into account cash flowers occuring after payback period. does not

7-2

I am so glad you asked for help when you needed it. ?