Exercise 24-2 _____ years Exercise 24-2 Doug’s Custom Construction Company is co

Question

Exercise 24-2

_____

years

Exercise 24-2

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $24,320. Each project will last for 3 years and produce the following net annual cash flows.
Year AA BB CC 1 $10,368 $13,504 $16,768 2 13,312 13,504 12,928 3 19,328 13,504 14,208 Total $43,008 $40,512 $43,904

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%.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Explanation / Answer

Payback period =Year up to which cummulative cash flow is negative+ (Cummulative cash flow of thta year /cash flow of next year)

AA = 2 + (640 /19328)= 2 +.03 = 2.03 Yeras

BB = 1 + (10816/13504)= 1 +.8 = 1.8 Years

CC = 1+ (7552 / 12928) = 1+ .58 = 1.58 years

AA BB CC year cash flow cummulative cash flow cash flow cummulative cash flow cash flow cummulative cash flow 0 - 24,320 -24320 -24,320 -24320 -24,320 -24320 1 10368 -13952 13504 -10816 16768 --7552 2 13312 -640 13504 2688 12928 5376 3 19328 18688 13504 14208

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