Exercise 26-2 (Part Level Submission) (a) Exercise 26-2 (Part Level Submission)

Question

Exercise 26-2 (Part Level Submission)

(a)

Exercise 26-2 (Part Level Submission)

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $29,480. Each project will last for 3 years and produce the following net annual cash flows.
Year AA BB CC 1 $9,380 $13,400 $17,420 2 12,060 13,400 16,080 3 16,080 13,400 14,740 Total $37,520 $40,200 $48,240

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

payback period for

AA- more than 3 years as still 44 to be recovered

BB- 2+(6832.66/9538.12)= 2.72 years

CC- 2+(1106.70/10491.93)= 2.11 years

MOST DESIRBALE IS CC which is least period 2.11 year

least desiable is AA which is having more than 3 yrs

project AA BB CC outlflow 29480 29480 29480 discounted cash flow DCF for 12% cash inflow DCF Cumulative inflow balance Cash outflow cash inflow DCF Cumulative inflow balance Cash outflow cash inflow DCF Cumulative inflow balance Cash outflow 1 0.8929 9380 8375.402 8375.402 21104.6 13400 11964.86 11964.86 17515.14 17420 15554.32 15554.32 13925.68 2 0.7972 12060 9614.232 17989.63 11490.37 13400 10682.48 22647.34 6832.66 16080 12818.98 28373.29 1106.706 3 0.7118 16080 11445.74 29435.38 44.622 13400 9538.12 32185.46 -2705.46 14740 10491.93 38865.23 -9385.23 total 37520 29435.38 40200 32185.46 48240 38865.23

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