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    Case 12 - Dilemma at Day-Pro

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    I would be very grateful to the OTA who can help me with the attached problems. Please do problems 1-9 ommiting #6.

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    Please see the attached files.

    1. Calculate the Payback Period of each project. Explain what argument Tim should make to show that the Payback Period is not appropriate in this case.

    The payback period is the time taken to recover the initial investment. The payback for epoxy resin is 2.5 years and for synthetic resin it is 1.5 years. The payback period does not consider the cash flows beyond the cut off. Even though synthetic resin payback is 1.5 years, the cash flows beyond the payback are much lower as compared to epoxy resin. Also the payback period does not take into consideration the time value of money. These are the reasons that payback period is not appropriate.

    2. Calculate the Discounted Payback Period (DPP) using 10% as the discount rate. Should Tim ask the Board to use DPP as the deciding factor? Explain.

    In discounted payback period we use the discounted cash flows and then find the time taken to recover the initial investment. The discounted payback for synthetic resin is 2.94 years and for epoxy resin is 1.77 years. The discounted payback takes into consideration the time value but still does not consider all the cash flows and so should not be used as ...

    Solution Summary

    The posting has solution to the case - dilemma at day-pro regarding the acceptance of projects - synthetic resin and epoxy resin
    It has has answers to problems 1-9 ommiting #6.