Chapter 6 Notes - Payback Periods with Salvage costs

Chapter 6 Notes - Payback Periods with Salvage costs -...

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Initial Investment $23,000 Rate 16% Years: Investment $(23,000) 1 $10,000 2 $8,000 3 $6,000 4 $5,000 $(1,828.61) 1.) PV of Cashflows $21,171.39 NPV ($1,828.61) Always want positive NPV, so if it is negative, you do not want to make the investment NPV is most commonly used and one of the best ones to use 2.) Payback Period: Left to Recover Investment 23000 1 $13,000 2 $5,000 3 0.833 Amount of year three that we will receive in order to recover the investment Payback period = 2.833 <-- showing that you used all of year one and two and that you will only use .83 of year three Payback period does not take into account the time value of money, so usually will not use this method. Only used when you don’t have enough information to use the other methods 3.) Discounted Payback Period: Left to Recover 1 $8,620.69 $14,379.31 2 $5,945.30 $8,434.01 3 $3,843.95 $4,590.06 4 $2,761.46 $1,828.61 We still have $1,828.61 to get paid back after the four years, so we will never breakeven on the investment. We never really recover the full investment, so according to the DPB we should not invest Third best method to use 4.) IRR: 11.42% Second best method to use 5.) AARR: Avergage Cash Inflow $7,250 Depreciation $5,750 Annual Savings w/ dep. $1,500 AARR = 6.52% In order for AARR to be useful, the company must already have an expected AARR in order to compare that to the AARR that we find.
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