Crane's Custom Construction Company is considering three new projects, each requiring an equipment investment of $27,280. Eachproject will last for 3 years and produce the following net annual cash flows.YearAABBCC1$8,680$12,400$16,120211,16012,40014,880314,88012,40013,640Total $34,720$37,200$44,640The equipment's salvage value is zero, and Crane uses straight-line depreciation. Crane will not accept any project with a cash paybackperiod over 2 years. Crane's required rate of return is 12%. Click here to view PV table.(a)Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.)AABBBByearsyearsCCyears

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Answered: Crane's Custom Construction Company is…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 22E

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The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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Lambert Manufacturing has P100,000 to invest in either Project A or Project B. The following data are available on these projects: Project A P100,000 Cost of equipment needed now Working capital investment needed now Annual cash operating inflows. Salvage value of equipment in 6 years Project B P60,000 P40,000 P35,000 P40,000 P10,000 Both projects will have a useful life of six (6) years. At the end of six (6) years, the working capital investment will be released for use elsewhere. Lambert's required rate of return is 14%. The company uses the total cost approach to evaluating alternatives. Required: 1. Compute the NPV of each project. Using this method of appraisal, which project must be chosen? Explain your answer. 2. Compute the Profitability Index of each project. Using this method of appraisal, which project must be chosen? Explain your answer. 3. Compute the IRR of each project. Using this method of appraisal, which project must be chosen? Explain your answer.
Flounder Manufacturing Company is considering three new projects, each requiring an equipment investment of $23,800. Each project will last for 3 years and produce the following cash flows. Year 1 2 3 Total (a) AA BB $7,600 $10,300 $11,600 10,300 10,600 10,300 9,600 15,600 $32,800 Click here to view PV tables. The salvage value for each of the projects is zero. Flounder uses straight-line depreciation. Flounder will not accept any project with a payback period over 2.2 years. Flounder's minimum required rate of return is 12%. Payback period (b) Your answer is correct. Compute each project's payback period. (Round answers to 2 decimal places, e.g. 52.75.) Most desirable $30,900 $31,800 Least desirable CC Indicating the most desirable project and the least desirable project using this method. Project CC eTextbook and Media 9,600 Project AA Most desirable Net present value $ Least desirable AA 2.42 years AA BB Compute the net present value of each project. (Use the above table.) (Round…
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