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ID: 2528171 • Letter: P
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Posted part "a" in another question
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Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows. Year S7,000 9,000 12,000 $28,000 $10,000 10,000 10,000 S30,000 S13,000 12,000 11,000 S36,000 Total 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%. Instructions (a) Compute each project's payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals and assume in your computations that cash flows occur evenly throughout the year.) (b) Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.) NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "7" .Explanation / Answer
Part 1
Pay Back Period = Years before full recovery + Unrecovered cost at Start of the year
Cash Flow during the year
Initial Investment = $22000
Project AA
Cash Flow
Cumulative Cash Flow
Pay Back Period = 2 + 6000/12000
= 2.5 Years
Project BB
Cash Flow
Cumulative Cash Flow
Pay Back Period = 2 + 2000/10000
= 2.2 Years
Project CC
Cash Flow
Cumulative Cash Flow
Pay Back Period = 1 + 9000/12000
= 1.75 Years
As per Pay back period Project CC is the most desirable project as it has lowest pack back period.
The lease desirable project is Project AA as it has the highest pack back period.
Part 2
Project AA
Amount of cash Flow
P.V. Factor @ 12%
Present Value
Cash Flow
Cash Flow
Cash Flow
Initial Investment
Net Present value
Project BB
Amount of cash Flow
P.V. Factor @ 12%
Present Value
Annual Cash Flow
Initial Investment
Net Present value
Project CC
Amount of cash Flow
P.V. Factor @ 12%
Present Value
Cash Flow
Cash Flow
Cash Flow
Initial Investment
Net Present value
No, my evaluation does not change. As per NPV method, Project CC is the most desirable project as it has the highest NPV.
Project AA is the least desirable project as it has thelowest NPV.
Cash Flow
Cumulative Cash Flow
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