Exercise 24-2 Open Show Work Exercise 24-2 Doug’s Custom Construction Company is
ID: 2454172 • Letter: E
Question
Exercise 24-2
Open Show Work
Exercise 24-2
Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $26,410. Each project will last for 3 years and produce the following net annual cash flows.Year AA BB CC 1 $11,259 $14,665 $18,209 2 14,456 14,665 14,039 3 20,989 14,665 15,429 Total $46,704 $43,995 $47,677
The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Explanation / Answer
Project Year Cash Flow Cumulative Discount Net Flow 0 -26410 -26410 1 -26410 1 11259 -15151 0.892857 10052.68 2 14456 -695 0.797194 11524.23 3 20989 20294 0.71178 14939.56 NPV 10106.47 Payback Period = 2+695/20989 2.03 years approximately Project BB Year Cash Flow Cumulative Discount Net Flow 0 -26410 -26410 1 -26410 1 14665 -11745 0.892857 13093.75 2 14456 2711 0.797194 11524.23 3 14456 17167 0.71178 10289.5 NPV 8497.48 Payback Period = 1+11745/14456 1.81 years approximately Project Year Cash Flow Cumulative Discount Net Flow 0 -26410 -26410 1 -26410 1 18209 -8201 0.892857 16258.04 2 14039 5838 0.797194 11191.8 3 15429 21267 0.71178 10982.06 NPV 12021.9 Payback Period = 1+8201/14039 1.6 years approximately In terms of payback [eriod the most desirable project is BB and least is AA
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