Exercise 12-2 Doug\'s Custom Construction Company is considering three new proje
ID: 2468719 • Letter: E
Question
Exercise 12-2 Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $24,200. Each project will last for 3 years and produce the following net annual cash flows. Year 1 $7,700 $11,000 $14,300 9,900 11,000 13,200 13,200 11,000 12,100 Total $30,800 $33,000 $39,600 3 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%. (Refer the below table)Explanation / Answer
PBP AA BB CC Time Amount Cumulative Amount Cumulative Amount Cumulative - (24,200.00) (24,200.00) (24,200.00) (24,200.00) (24,200.00) (24,200.00) 1.00 7,700.00 (16,500.00) 11,000.00 (13,200.00) 14,300.00 (9,900.00) 2.00 9,900.00 (6,600.00) 11,000.00 (2,200.00) 13,200.00 3,300.00 3.00 13,200.00 6,600.00 11,000.00 8,800.00 12,100.00 15,400.00 PBP 2+ 6600/13200 2 + 2200/11000 1 + 9900/13200 PBP 2.5 Years 2.2 years 1.75 Years CC is the most desirable project AA is the most desirable project Statement showing Cash flows Project AA Project BB Project CC Particulars Time PVf@12% Amount PV Amount PV Amount PV Cash Outflows - 1.00 (24,200.00) (24,200.00) (24,200.00) (24,200.00) (24,200.00) (24,200.00) PV of Cash outflows (24,200.00) (24,200.00) (24,200.00) Cash inflows 1.00 0.8929 7,700.00 6,875.00 11,000.00 9,821.43 14,300.00 12,767.86 Cash inflows 2.00 0.7972 9,900.00 7,892.22 11,000.00 8,769.13 13,200.00 10,522.96 Cash inflows 3.00 0.7118 13,200.00 9,395.50 11,000.00 7,829.58 12,100.00 8,612.54 PV of Cash Inflows 24,162.72 26,420.14 31,903.36 NPV (37.28) 2,220.14 7,703.36 CC is the most desirable project AA is the most desirable project
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