(a) Doug’s Custom Construction Company is considering three new projects, each r

Question

(a)

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $19,570. Each project will last for 3 years and produce the following net annual cash flows.
Year AA BB CC 1 $8,343 $10,867 $13,493 2 10,712 10,867 10,403 3 15,553 10,867 11,433 Total $34,608 $32,601 $35,329

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 to view the factor table.

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

Explanation / Answer

The payback period is the length of time required to recover the cost of an investment

Payback Period = Cost of Project / Annual Cash Inflows

Summary

Payback Period of Project AA Year Cash flows Cummulative Cash flows 1 8343 8343 2 10712 19055 3 15553 34608 Initial cost 19570 Amount Recovered upto 2nd year 19055 To be recovered in 3rd year 515 Therefore Pay back period =2 years +515/15553 2.03 years

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