Exercise 24-2 (part level submission) (a) Exercise 24-2 (part level submission)
ID: 2492189 • Letter: E
Question
Exercise 24-2 (part level submission)
(a)
Exercise 24-2 (part level submission)
Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,610. Each project will last for 3 years and produce the following net annual cash flows.Year AA BB CC 1 $9,639 $12,555 $15,589 2 12,376 12,555 12,019 3 17,969 12,555 13,209 Total $39,984 $37,665 $40,817
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
a. Here we are taking payback period for calculation not discounted payback period.
project
AA
Cumulative
Cashflow
Project
BB
Cumulative
Cashflow
Project
CC
Cumulative
Cashflow
Payback
Period
2+(595/17969)
=2.03 years
1+(10055/12555)
=1.80 years
1+(7021/12019)
=1.58 years
The most desirable project based on payback period is project CC
The least desirable project based on payback period is project AA
Yearproject
AA
Cumulative
Cashflow
Project
BB
Cumulative
Cashflow
Project
CC
Cumulative
Cashflow
0 -22610 -22610 -22610 -22610 -22610 -22610 1 9639 -12971 12555 -10055 15589 -7021 2 12376 595 12555 12019 3 17969 12555 13209Payback
Period
2+(595/17969)
=2.03 years
1+(10055/12555)
=1.80 years
1+(7021/12019)
=1.58 years
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