Exercise 26-2 Your answer is partially correct. Try again. Doug\'s Custom Constr
ID: 2525429 • Letter: E
Question
Exercise 26-2 Your answer is partially correct. Try again. Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,660. Each project will last for 3 years and produce the following net annual cash flows. Year AA $7,210 $10,300 $13,390 9,270 10,300 12,360 12,360 10,300 11,330 Total $28,840 $30,900 $37,080 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 Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25 2.50 years 2.20 years 1.75 years Which is the most desirable project? The most desirable project based on payback period is Project CC Which is the least desirable project? The least desirable project based on payback period is Project AA ;Explanation / Answer
Solution a:
Payback period:
Project AA = 2 + ($22,660 - $16,480) / 12360 = 2.50 years
Project BB = 2+ ($22,660 - $20,600) / $10,300 = 2.20 years
Project CC= 1 + ($22,660 - $13,390) / $12,360 = 1.75 years
The most desireable project on the basis of payback period is Project CC.
The least desireable project on the basis of payback period is Project AA.
Solution B:
The most desireable project on the basis of payback period is Project CC.
The least desireable project on the basis of payback period is Project AA.
Computation of Cumulative Cash flows Period AA BB CC Cash inflows Cumulative Cash Inflows Cash inflows Cumulative Cash Inflows Cash inflows Cumulative Cash Inflows 1 $7,210.00 $7,210.00 $10,300.00 $10,300.00 $13,390.00 $13,390.00 2 $9,270.00 $16,480.00 $10,300.00 $20,600.00 $12,360.00 $25,750.00 3 $12,360.00 $28,840.00 $10,300.00 $30,900.00 $11,330.00 $37,080.00Related Questions
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