Question

Ignment > Open Assignment CALCULATOR FULL SCREEN PRINTER VERSION « BACK NEX Exercise 25-02 (Video) Crane's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,220. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $7,070 $10,100 $13,130 2 9 ,090 10,100 12,120 3 12,120 10,100 11,110 Total $28,280 $30,300 $36,360 The equipment's salvage value is zero, and Crane uses straight-line depreciation. Crane will not accept any project with a cash payback period over 2 years, Crane's required rate of return is 12%. Click here to view E table. (a) Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) years years years Which is the most desirable project? The most desirable project based on payback period is

Answer 1

(a)	Project AA:
					Year 0	Year 1	Year 2	Year 3
	Expected cash flow			a	-22220	7070	9090	12120
	Cumulative cash flow				-22220	-15150	-6060	6060
	Payback period=Years before full recovery of cost+(Unrecovered cash flow at the start of the year/Cashflow during the year)=2+(6060/12120)=2+0.50=2.50 years
	Project BB:
	Payback period=Initial investment/Cashflow per annum=22220/10100=2.20 years
	Project CC:
					Year 0	Year 1	Year 2	Year 3
	Expected cash flow			a	-22220	13130	12120	11110
	Cumulative cash flow				-22220	-9090	3030	14140
	Payback period=Years before full recovery of cost+(Unrecovered cash flow at the start of the year/Cashflow during the year)=1+(9090/12120)=1+0.75=1.75 years
	The most desirable project based on payback period is Project CC since it's payback period is less than 2 years