5.3 You are given the following financial data about a new system to be implemented at a
company:
•
investment cost at n = 0: $10,000
•
investment cost at n = 1: $15,000
•
useful life: 10 years
•
salvage value (at the end of 11 years): $5,000
•
annual revenues:$12,000 per year
•
annual expenses:$4,000 per year
•
MARR: 10%
Note: The first revenues and expenses will occur at the end of year two.
(a)
Determine the conventional-payback period.
(b) Determine the discounted-payback period.
Answer
(a)
n
Cash Flow
Cumulative
Cash Flow
0
-$10,000
-$10,000
1
-15,000
-25,000
2
8,000
-17,000
3
8,000
-9,000
4
8,000
-1,000
5
8,000
7,000
It will take 4.13 years to recover the total investment.
1,000/8,000 = .125
(b)
n
Cash
Flow
Cost of
Funds
Cumulative
CF
0
-$10,000
$0
-$10,000
1
-15,000
-1,000
-26,000
2
8,000
-2,600
-20,600
3
8,000
-2,060
-14,660
4
8,000
-1,466
-8,126
5
8,000
-813
-939
6
8,000
-94
6,967
The total investment is recovered in year 6. After 5.12 years.
939 / (8,000 - 94) =7,906
939/7,906 = .12
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