EXERCISE 12

# EXERCISE 12 - EXERCISE 12-2(a Year 1 2 3 AA Net Annual Cash...

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EXERCISE 12-2 (a) AA Year Net Annual Cash Flow Cumulative Cash Flow 1 2 3 \$ 7,000 9,000 15,000 \$ 7,000 16,000 31,000 Cash payback period 2.33 years \$21,000 – \$16,000 = \$5,000 \$5,000 ÷ \$15,000 = .33

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EXERCISE 12-2 (Continued) BB 21,000 ÷ (28,500 ÷ 3) = 2.21 years CC Year Net Annual Cash Flow Cumulative Cash Flow 1 2 3 \$13,000 10,000 11,000 \$13,000 23,000 34,000 Cash payback period 1.8 years \$21,000 – 13,000 = \$8,000 \$8,000 ÷ \$10,000 = .8 The most desirable project is CC because it has the shortest payback period. The least desirable project is AA because it has the longest payback period. As indicated, only CC is acceptable because its cash payback is 1.8 years. (b) AA BB CC Year Discount Factor Cash Flow Present Value Cash Flow Present Value Cash Flow Present Value 1 2 3 .89286 .79719 .71178 \$ 7,000 9,000 15,000 \$ 6,250 7,175 10,677 \$9,500 9,500 9,500 \$ 8,482 7,573 6,762 \$13,000 10,000 11,000 \$11,607 7,972 7,830 Total present value Investment Net present value 24,102 (21,000 \$ 3,102
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EXERCISE 12 - EXERCISE 12-2(a Year 1 2 3 AA Net Annual Cash...

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