Payback period

costs 140000
net cash inflows 35000
payback period desired 5

payback period = investment required/annual net cash inflow

payback period = 4 years

Answer: the payback period of 4 years is less than the 5 years desired. So it worth the deal.
 Project X Project Y
initial invesment $ 100,000.00 $ 100,000.00
year 1 cash inflow $ 60,000.00 $ 60,000.00
year 2 cash inflow $ 40,000.00 $ 35,000.00
year 3 cash inflow $ - $ 25,000.00

Year Project x Cash flows Cumulative cash flows

0 $ -100,000.00 $ -100,000.00
1 $ 60,000.00 $ -40,000.00
2 $ 40,000.00 $ -

Payback period = last period with a negative cumulative cash flow + (absolute value of cumulative cashflow at the period/c

last period with a

negative cumulative
cash flow 1

absolute value of
cumulative cash
flows at that period $ -40,000.00 40000
cash flow after that
period $ 40,000.00

Payback period = 2 years

Year Project Y Cash flows Cumulative cash flows

0 $ -100,000.00 $ -100,000.00
1 $ 60,000.00 $ -40,000.00
2 $ 35,000.00 $ -5,000.00 5000
3 $ 25,000.00 $ 20,000.00

last period with a

negative cumulative
cash flow 2

absolute value of
cumulative cash
flows at that period $ -5,000.00 5000
cash flow after that
period $ 25,000.00

Payback period = 2.2 years

Project X has the shortest payback period

tive cashflow at the period/cash flow after that period)
sales $ 150,000.00 sales
variable expenses $ 90,000.00 variable expenses
contr margin $ 60,000.00 contr margin
fixed expenses: fixed expenses:
salaries $ 27,000.00 salaries
maintenance $ 3,000.00 depreciation
depreciation $ 10,000.00 fixed out of pocket
Total fixed expenses $ 40,000.00 Total fixed expenses
Net Operating income $ 20,000.00 Net Operating income

cost of new equipment $ 80,000.00 cost of new equipment

vending machine can be sold for $ 5,000.00 vending machine can be sold for

payback period desired 3 payback period desired

1st step 1st step

Net Operating income $ 20,000.00 Net Operating income

noncash deduction for noncash deduction for

depreciation $ 10,000.00 depreciation

Annual net cash inflow $ 30,000.00 Annual net cash inflow

2nd step 2nd step

cost of new equipment $ 80,000.00 cost of new equipment

salvage value of old salvage value of old
equipment $ 5,000.00 equipment

Investment required $ 75,000.00 Investment required

3rd step 3rd step

Investment required $ 75,000.00 Investment required

Annual net cash inflow $ 30,000.00 Annual net cash inflow
Payback period 2.5 years Payback period

2,5 is less than the 3 years payback desired, so is acceptable 2,5 is less than the 3 years payback desired
 product a product b
$ 250,000.00 sales $ 350,000.00
$ 120,000.00 variable expenses $ 170,000.00
$ 130,000.00 contr margin $ 180,000.00
fixed expenses:
salaries
$ 34,000.00 depreciation $ 76,000.00
$ 70,000.00 fixed out of pocket $ 50,000.00
$ 104,000.00 Total fixed expenses $ 126,000.00
$ 26,000.00 Net Operating income $ 54,000.00

cost of new
$ 170,000.00 equipment $ 380,000.00
vending machine can
an be sold for be sold for
payback period
5 desired 5

1st step

Net Operating
$ 26,000.00 income $ 54,000.00

noncash deduction
$ 34,000.00 for depreciation $ 76,000.00
Annual net cash
$ 60,000.00 inflow $ 130,000.00

2nd step
cost of new
$ 170,000.00 equipment $ 380,000.00
salvage value of old
$ - equipment $ -

$ 170,000.00 Investment required $ 380,000.00

3rd step

$ 170,000.00 Investment required $ 380,000.00

Annual net cash
$ 60,000.00 inflow $ 130,000.00
2.83 years Payback period 2.92 years

3 years payback desired, so is acceptable

Payback and uneven cash flows

year investment cash inflow unrecovered investment

1 $ 52,000.00 $ 4,000.00 $ 48,000.00
2 $ 6,000.00 $ 8,000.00 $ 46,000.00
3 $ 16,000.00 $ 30,000.00
4 $ 17,000.00 $ 13,000.00
5 $ 20,000.00 $ -7,000.00
6 $ 18,000.00 $ -18,000.00
7 $ 16,000.00 $ -34,000.00
8 $ 14,000.00 $ -48,000.00
9 $ 13,000.00 $ -61,000.00
10 $ 13,000.00 $ -74,000.00

payback period = number of years up to the year in which the investment is paid off + (unrecovered investment at the beg

Payback period = 4.61 years

vered investment at the beginning of the year in which the investment is paid off/cash inflow in the period in which the investment is
n which the investment is paid off)
Net Present Value Method

Cost of special equipment $ 160,000.00

Working capital required $ 100,000.00
Relining of the equipment in
$ 30,000.00
three years
Salvage value of the equipment
$ 5,000.00
in five years
Annual revenues and costs:
Sales revenue from parts $ 750,000.00
Cost of parts sold $ 400,000.00
Out-of-pocket operating
costs (for salaries, shipping, $ 270,000.00
and so forth)

discount rate 11% 0.11

At the end of five years the working capital would be released for use elsewhere in the company.

Sales revenue from parts $ 750,000.00

Cost of parts sold $ 400,000.00

Out-of-pocket operating costs

(for salaries, shipping, and so
forth) $ 270,000.00
Annual Net Cash Inflow from
operations $ 80,000.00

Net Present Value Method

years
Now 1 to 5 3 5
Cost of special equipment $ -160,000.00
Working capital required $ -100,000.00
Annual net cash inflows $ 80,000.00
Relining of the equipment in
three years $ -30,000.00
Salvage value of the equipment
in five years $ 5,000.00
Working capital released $ 100,000.00
Total cash flows (a) $ -260,000.00 $ 80,000.00 $ -30,000.00 $ 105,000.00
Discount factor (11%) (b) 1 $ 3.696 $ 0.731 $ 0.593
Present Value of the cash flows
(a*b) $ -260,000.00 $ 295,671.76 $ -21,935.74 $ 62,312.39
Net Present Value (if positive, is
acceptable) $ 76,048.41

1 is the present value for any cash that occurs immediately

P = Fn/(1+r)^n
P annuity = (1/r)*(((1-(1/(1+r)^n))

If the Net Present Value is positive or zero, then the project is acceptable because its return is greater orequal than the require
er orequal than the required rate of return
initial investment 3170
no salvage value
increase net cash inflows 1000 per year
years 4
discount factor 10% 0.1

discount factor formula P annuity = (1/r)*(((1-(1/(1+r)^n))

years
now 1 to 4
initial investment $ -3,170.00
annual cost savings $ 1,000.00
total cash flows (a) $ -3,170.00 $ 1,000.00
discount factor (10%) (b) 1 3.170
present value of the cash flow (a*b) $ -3,170.00 $ 3,170
Net present value (SUM above) $ -0

the project has exactly 10% return as the net present value is zero

(1) (3) return (4) Recovery (5)

Investment on of unrevovered
(2) Cash
Year outstanding investme investment investment at
inflow
during the nt during the the end of the
year (1)*10% year (2-3) year (1-4)

1 3170 1000 317 683 2487

2 2487 1000 249 751 1736
3 1735.7 1000 174 826 909
4 909.27 1000 91 909 0
Total investment recovered 3170
 Cost of special equipment $ 170,000.00
Working capital required
Overhaul of the equipment in
four years
Salvage value of the
equipment in five years

Annual revenues and costs:

Sales revenue $ 250,000.00

Cost of goods sold $ 120,000.00
Out-of-pocket operating
costs (for salaries,
$ 70,000.00
advertising and direct
costs)

discount rate 14% 0.14

Net Present Value Method

years
Now 1 2 3 4
Cost of special equipment $ -170,000.00
Working capital required $ -
Sales revenue $ 250,000.00 $ 250,000.00 $ 250,000.00 $ 250,000.00
Cost of goods sold $ -120,000.00 $ -120,000.00 $ -120,000.00 $ -120,000.00

Out-of-pocket operating costs

(for salaries, advertising and
direct costs) $ -70,000.00 $ -70,000.00 $ -70,000.00 $ -70,000.00
Overhaul of the equipment in
four years $ -
Salvage value of the equipment
in five years
working capital released
Total cash flows (a) $ -170,000.00 $ 60,000.00 $ 60,000.00 $ 60,000.00 $ 60,000.00
Discount factor (14%) (b) 1 $ 0.877 $ 0.769 $ 0.675 $ 0.592
Present Value of the cash
flows (a*b) $ -170,000.00 $ 52,631.58 $ 46,168.05 $ 40,498.29 $ 35,524.82
Net Present Value (if positive,
is acceptable) $ 35,984.86

because the NPV is positive, the new product is acceptable

 5

$ 250,000.00
$ -120,000.00

$ -70,000.00

$ -
$ -
$ 60,000.00
$ 0.519

$ 31,162.12
cost of equipment $ 16,950.00
period-line of use 10 years
salvage value $ -
labor savings $ 3,000.00 per year

Factor of the internal rate of return = investment required/annual net cash inflow

Investment required $ 16,950.00

annual net cash inflow $ 3,000.00
Discount factor of IRR 5.650

USAR A TABELA INVERSA DO CLAUBER

annual savings in part

time help 30000
salvage
added CM for expanded
sales 0 units cm per unit
annual cash inflows 30000

investment required 102990

annual cash inflows 30000
Factor IRR 3.4330 ver na tabela este fator junto com os 6 anos, vai dar 9%
minimum annual cash flows required = negative NPV/present value factor @12% for 10 years

50000