E10-2 Jack’s Custom manufacturing Company is considering three new projects, each requiring an equipment investment of $21,000. Each project will last for 3 years and produce the following net annual cash flows
Year AA BB CC
1 $7,000 $9,500 $13,000
2 9,000 9,500 10,000
3 15,000 9,500 11,000
Total $31,000 $28,500 $34,000
The equipment’s salvage value is zero, and jack uses straight-line depreciation. Jack will not accept any project with a cash payback period over 2 years. Jack’s required rate of return is 12%.
Instructions
(a) Compute each project’s payback period, indicating the most desirable project and the lease 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.)
Year AA BB CC
1 $7,000 $9,500 $13,000
2 9,000 9,500 10,000
3 15,000 9,500 11,000
Total $31,000 $28,500 $34,000
The equipment’s salvage value is zero, and jack uses straight-line depreciation. Jack will not accept any project with a cash payback period over 2 years. Jack’s required rate of return is 12%.
Instructions
(a) Compute each project’s payback period, indicating the most desirable project and the lease 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.)
