Traditionally, Granite Company has accepted a proposal only if the payback perio

Question

Traditionally, Granite Company has accepted a proposal only if the payback period is less than 50 percent of the asset's useful life. Peggy Casteelis the new accounting manager. She suggested to management that capital budgeting decisions should not be made based solely on the payback period. Granite Company is currently considering purchasing a new machine for the factory that would cost 11 2,000 and would be sold after 8 years for $50,000. The new machine will generate annual cash flows of $30,000 in its first year of use, $24000 in its second year of use, $20,000 in the third year and $14,800 each year thereafter. The company's cost of capital is 12 percent. Required 1-a. Complete the table given below. Uepaid Year Investment 1-b. Calculate the payback period. (Round your answer to 2 decimal places.) 1-c. Would Granite Company accept this project based solely on the payback period? O Yes 2.a. Complese the table given below and Calculane NPV. (Euture Value of $1. Present Value of $1. Euture Valus Annuity of $1. Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round final answers to the nearest whole dollar amount) Year Cash Outtow PV of $1 (123)Present Vaue 2-b. Would Granite Company accept this project if the NPV method is used to evaluste the machine? O No O Yes

Explanation / Answer

1 -a ) Completed the table given Year Initial Investment Annual cash flow Unpaid Investment 1 112000 30000 82000 2 24000 58000 3 20000 38000 4 14800 23200 5 14800 8400 6 14800 -6400 7 14800 8 64800 (14800+50000) 1 -b ) Calculation of Payback period Paback period =5 years + 8400/14800 =5 years +0.57 years =5.57 Years 1-C) Would granite company accept the project based on solely on the pay back period NO Granite company can not accept the project only based ob the payback period, because it does not consider the time value of Money 2 -a ) Complete the table given below and calculate NPV Year Cash flow Present Value $1(12%) present Value of cash flows 0 $             -1,12,000.00 $                                    1.00000 $                                     -1,12,000.00 1 $                  30,000.00 $                                    0.89286 $                                          26,785.71 2 $                  24,000.00 $                                    0.79719 $                                          19,132.65 3 $                  20,000.00 $                                    0.71178 $                                          14,235.60 4 $                  14,800.00 $                                    0.63552 $                                            9,405.67 5 $                  14,800.00 $                                    0.56743 $                                            8,397.92 6 $                  14,800.00 $                                    0.50663 $                                            7,498.14 7 $                  14,800.00 $                                    0.45235 $                                            6,694.77 8 $                  14,800.00 $                                    0.40388 $                                            5,977.47 Residual value $                  50,000.00 $                                    0.40388 $                                          20,194.00 NPV $                                            6,321.94 (2-b) Would Granite Company accept this project if the NPV method used to evalue the mechine Yes The Project can be accepted if the NPV method is used to evalue. Bacause it is generating Positive Net present Value

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