(Payback and discounted payback period calculations) The Bar-None Manufacturing
ID: 2796087 • Letter: #
Question
(Payback and discounted payback period calculations) The Bar-None Manufacturing Co. manufactures fence panels used in cattle feed lots throughout the Midwest. Bar-None's management is considering three investment projects for next year but doesn't want to make any investment that requires more than three years to recover the firm's initial investment. The cash flows for the three projects (Project A, Project B, and Project C) are as follows a. Given Bar-None's three-year payback period, which of the projects will qualify for acceptance? b. Rank the three projects using their payback period. Which project looks the best using this criterion? Do you agree with this ranking? Why or why not? c. If Bar-None uses a discount rate of 10.2 percent to analyze projects, what is the discounted payback periad for each of the three projects? If the firm still maintains its three-year payback policy for the discounted payback, which projects should the firm undertake? a. Given the cash flow information in the table, the payback period of P Data Table maximum acceptable payback period. (Select from the drop-down If the firm requires a 3-year payback before an investment can be menus.) Project c S(5,300) 1,500 1,500 3,000 3.000 3,000 Project A $(1,100) Year Project B S(9,800) 6,000 4,000 4,000 4,000 4,000 The payback period of Project B is years. Round to two decimal p 700 250 180 70 430 Print DoneExplanation / Answer
Ques 1 - (i) Project A Payback period = Year cash flows Cumulative cash flows 0 -1100 0 1 700 700 2 250 950 3 180 1130 4 70 1200 5 430 1630 Payback period = 2 + (1100 - 950)/180 = 2.83 Years Project B Payback period = Year cash flows Cumulative cash flows 0 -9800 0 1 6000 6000 2 4000 10000 3 4000 14000 4 4000 18000 5 4000 22000 Payback period = 1 + (9800- 6000)/4000 = 1.95 Years Project C Payback period = Year cash flows Cumulative cash flows 0 -5300 0 1 1500 1500 2 1500 3000 3 3000 6000 4 3000 9000 5 3000 12000 Payback period = 2 + (5300-3000)/3000 = 2.77 Years Project Payback Ranking(Low to high) A 2.83 3 B 1.95 1 C 2.77 2 All the three projects are acceptable as all of them have a payback lower then 3years (ii) Discounted payback - Project A Discounted payback - Year cash flows PV factor @ 10.2% PV of cash flows Cumulative cash flows 0 -1100 1 -1100 -1100 1 700 0.907441 635.2087 -464.791 2 250 0.823449 205.8623 -258.929 3 180 0.747232 134.5017 -124.427 4 70 0.678069 47.4648 -76.9625 5 430 0.615307 264.5821 187.6196 Discounted payback = 4 + (76.9625/264.5821) = 4.29 Years Project B Discounted payback - Year cash flows PV factor @ 10.2% PV of cash flows Cumulative cash flows 0 -9800 1 -9800 -9800 1 6000 0.907441 5444.646 -4355.35 2 4000 0.823449 3293.797 -1061.56 3 4000 0.747232 2988.926 1927.369 4 4000 0.678069 2712.274 4639.644 5 4000 0.615307 2461.229 7100.872 Payback period = 2 + (1061.56/2988.926) = 2.36 Years Project C Payback period = Year cash flows PV factor @ 10.2% PV of cash flows Cumulative cash flows 0 -5300 1 -5300 -5300 1 1500 0.907441 1361.162 -3938.84 2 1500 0.823449 1235.174 -2703.66 3 3000 0.747232 2241.695 -461.97 4 3000 0.678069 2034.206 1572.236 5 3000 0.615307 1845.922 3418.158 Payback period = 3 + (461.97/2034.206) = 3.23 Years Project Payback Ranking(Low to high) A 4.29 3 B 2.36 1 C 3.23 2 only project B is acceptable as only B provides payback within 3 years As per chegg guidelines we are supposed to do only one question at a time so please provide the rest of the questions separately. Please provide feedback…. Thanks in advance…. :-)
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