Question

Which of the following statements is correct? C The payback period is the length of time it takes for an investment to recoup its A) own initial cost out of the cash receipts it generates. O B Projects with shorter payback periods are always more profitable than projects with longer payback periods. C The payback method of making capital budgeting decisions gives ful c) consideration to the time value of money. O If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equi Hogan Company has gathered the following data on a proposed investment project. Discount rate Life of the investment Investment required in equipment Anmual cash inflows Salvage value What is the payback period for the proposed investment? 10% 10 years $400,000 80,000 0 0.2 years A) B)1.0 years 3.0 years C) 5.0 years D) Hogan Company has gathered the following data on a proposed investment project. Discount rate Life of the investment Investment required in equipment Annual cash inflows Salvage value (Note that this is the same data that was provided for the previous question.) What is the net present value on the proposed investment? 10% 10 years $400,000 80,000 $96,720 B)ss0,000 $91,600 A) C)

Answer 1

The correct statement regarding the payback period as follows

-The payback period is the length of time it takes for an investment to recoup its own initial cost out of cash receipt it generates.

Payback Period for the Proposed Investment

Payback Period for the Proposed Investment = Initial Investment required / Annual net cash inflow

= $400,000 / $80,000 per year

= 5.0 Years

Net Present Value (NPV) of the Investment

Net Present Value (NPV) = Present Value of annual cash inflows – Initial investment

= $80,000[PVIFA 10%, 10 Years] - $400,000

= [$80,000 x 6.145] - $400,000

= $491,600 - $400,000

= $91,600

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.