Weygandt, Financial & Managerial Accounting, 2e PRENTER VERSION BACK Exercise 26

Question

Weygandt, Financial & Managerial Accounting, 2e PRENTER VERSION BACK Exercise 26-2 for 3 years and produce the following net annual cash flows Year AA Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $25,300. Each praject wit last 1$8,050 $11,500 $14,950 2 10,350 11,500 13,800 13,800 11,500 12,650 Total $32,200$34,500 $41,400 The equipment's salvage value is zero, and Doug uses straight-ine depreciation. Doug will not accept any preject with a cesh péyback peried over 2 years. Doug's required rate of return is 12%. Oahentorneytable. Compute each project's payback period. (Round anawers to 2 decimal places, e.s. 15.25.) which is the mast desirable projeet? The most desirable project based on payback peniod is Which is the least desirable project? The east desirable propea bases en payback penod

Explanation / Answer

Doug's Custom Construction company Payback Period Project AA Year Investment Operating Cash flow Cumulative Cash Flow 0 $      (25,300.00) $                          (25,300.00) 1 $                     8,050.00 $                          (17,250.00) 2 $                   10,350.00 $                             (6,900.00) 3 $                   13,800.00 Pyaback Period= 2+(6900/13800) Years 2.50 Years Project BB Year Investment Operating Cash flow Cumulative Cash Flow 0 $      (25,300.00) $                          (25,300.00) 1 $                   11,500.00 $                          (13,800.00) 2 $                   11,500.00 $                             (2,300.00) 3 $                   11,500.00 Pyaback Period= 2+(2300/11500) Years 2.20 Years Project CC Year Investment Operating Cash flow Cumulative Cash Flow 0 $      (25,300.00) $                          (25,300.00) 1 $                   14,950.00 $                          (10,350.00) 2 $                   13,800.00 $                               3,450.00 3 $                   12,650.00 Pyaback Period= 1+(10350/13800) Years 1.75 Years Projects Payback Period AA 2.5 Years BB 2.2 Years CC 1.75 Years Project CC is most desirable project on the basis of Payback period because it has least payback period. Project AA is least desirable Project because its payback back is 2.50 Years NPV P.V Factor@12%= (1) Cash Flow of Project AA=(2) P.V of Project AA=(1)*(2) Cash Flow of Project BB=(3) Cash Flow of Project BB=(1)*(3) Cash Flow of Project CC=(4) Cash Flow of Project CC=(1)*(4) Year Investment 0 1 $                 (25,300.00) $                          (25,300.00) $ (25,300.00) $      (25,300.00) $ (25,300.00) $ (25,300.00) 1 0.893 $                     8,050.00 $                               7,188.65 $   11,500.00 $        10,269.50 $   14,950.00 $     13,350.35 2 0.797 $                   10,350.00 $                               8,248.95 $   11,500.00 $          9,165.50 $   13,800.00 $     10,998.60 3 0.712 $                   13,800.00 $                               9,825.60 $   11,500.00 $          8,188.00 $   12,650.00 $       9,006.80 NPV $                                   (36.80) $          2,323.00 $       8,055.75 Projects NPV AA $              (36.80) BB $           2,323.00 CC $           8,055.75 On the basis of NPV Project CC is most desirable because it has hgher NPV. Project AA is least desirable because it has negative NPV

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