Exercise 12-2 Doug\'s Custom Construction Company is considering three new proje
ID: 2530641 • Letter: E
Question
Exercise 12-2 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 $7,210 $10,300 $13,390 9,27010,300 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 here toview PV table. Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) years years ?? years Which is the most desirable project? The most desirable project based on payback period is Which is the least desirable project? The least desirable project based on payback period is Compute the net present value of each project. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g.(45). Round final answers to the earest whole dollar, e.g. 5,275. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)Explanation / Answer
Solution a:
Payback period:
Project AA = 2years + ($22,660 - $16,480) / $12,360 = 2.5 years
Project BB = 2 years + ($22,660 - $20,600) / $10,300 = 2.2 years
Project CC = 1 year + ($22,660 - $13,390) / $12,360 = 1.75 years
The most desirable project on the basis of payback period is Project CC
The least desirable project on the basis of payback period is Project AA.
solution b:
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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