Asked by pdean0657

# I wasn't sure about the payback period for both problem a and b. If...

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Problem 26.2A, page 1138 a. Proposal A (1) Payback period - 4.44 Years Estimated annual net cash flows = $56,000 + $70,000 = $126,000 Amount to be invested $560,000 = = 4.44 years Estimated annual net cash flows $126,000 (2) Return on average investment - 20% Original cost + Salvage value $560,000 Average investment = = = $280,000 2 2 Average estimated net income $56,000 = 20% Average investment $280,000 (3) Net present value, discounted at an annual rate of 12 percent Present value of expected annual cash flows ($126,000 x 4.968) $625.968 Cost of investment 560.000 Net present value of proposed investment $65.968

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b. Proposal B (1) Payback period - 4.9 years Estimated annual net cash flows = $40,000 + $60,000 = $100,000 Amount to be invested $490,000 = 4.9 years Estimated annual net cash flows $100,000 (2) Return on average investment - 14% Original cost + Salvage value $490,000 + $70,000 Average investment = = = $280,000 2 2 Average estimated net income $40,000 Average investment $280,000 14% (3) Net present value, discounted at an annual rate of 12 percent Present value of expected annual cash flows ($100,000 x 4.564) $456.400 Present value of proceeds from disposal ($70,000 * 0.452) 31.640 Total present value of investment's future cash flows $488.040 Cost of investment 490.000 Net present value of proposed investment $(1,960)

I wasn't sure about the payback period for both problem a and b. If they are wrong, then my net present values would be wrong. Any help would be appreciated.

Answered by ksachdev360

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