Urgent Help Needed

[jimzacc]

Hey guys I need a bit of help on this practice question for an exam I have coming up....I am not very strong with accounting so any help would be great.

I've been set this question

An investment project is expected to last three years. The expected profits for the first year are £40,000, with profits for the second and third years expected to be £25,000 per year. The project requires that a machine be bought, at a cost of £80,000, which can be sold at the end of Year 3 for £20,000.


What is the average profit of the investment?



What is the average investment required to earn that profit?


I just can't seem to get my head around how to do this. I've tried doing the question and for part A, I seem to have just added up the total for 3 years then divided by 3 so I get 30,000? I don't know if I'm doing it right. For the second part I am really clueless

I've also been given this one

Purple Enterprises is considering investing in a new machine at a cost of £120,000. The expected cash inflows are as follows:

£
Year 1 40,000
Year 2 50,000
Year 3 50,000
Year 4 45,000
Year 5 35,000

The company’s cost of capital is 10%.

Assuming cashflows occur evenly through the year, what is the payback period of the investment?

Investment divided by annual cash flow

So we have 120000 to make up here.
40+50+50= 140000 in 3 years
50,000 divided by 12 = 4167 per month

So 4167 * 7 = 29169 + 50,000+40,000

I am probably doing it completely wrong, I just need some guidance



Thanks for any help you may give me, the forumla to work these out would be appreciated

[jimzacc]

please anyone? :)

[ravish.singhvi]

Hi Jim,

Solution to second question,
Your calculation is perfectly right in case you do not have to deal with discounting factor (which is based on cost of capital). However, if you take into account the cost of capital of a project to get the accurate payback period, the calculation becomes bit different. The calculation would be as follows:

Year Amount PV factor @10% PV of Cashflows
1 40000 0.909 36363.64
2 50000 0.826 41322.31
3 50000 0.751 37565.74
4 45000 0.683 30735.61
5 35000 0.621 21732.25

Now your initial investment of 120000 will be recovered in 3 years + 1.8 months i.e.
(120000- (36363.63+41322.31+37565.74) = 4748 which is equal to 3 years
now, 4748 will be recovered in 4th year, since the cashflows are occuring evenly throughout the year we will calculate the number of months as:
((12/30735.60)*4748) = 1.85 months or 56 days ((365/30735.60)*4748)

So, the answer would be 37.8 months.