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# Payback period and Net present value calculations

E23-12
Suzaki Manufacturing Company is considering three new projects, each requiring an equipment investment of \$22,000. Each project will last for 3 years and produce the following cash inflows.
Year AA BB CC
1 \$ 7,000 \$ 9,500 \$13,000
2 9,000 9,500 10,000
3 15,000 9,500 9,000
Total \$31,000 \$28,500 \$32,000

The equipment's salvage value is zero. Suzaki uses straight-line depreciation. Suzaki will not accept any project with a payback period over 2 years. Susaki's minimum required rate of return is 12%.
a) Compute each project's payback period, indication the most desirable project and the least desirable project using this method. (Round to two decimals).
b)Compute the net present value of each project. Does your evaluation change? (Round to the nearest dollar)

#### Solution Preview

a. Project AA:

Years 0 1 2 3
Cash flows -22,000 7,000 9,000 15,000
Cumulative cash flow -22,000 -15,000 -6,000 9,000

Payback AA = 2 + 6,000/15,000 = 2.4 years

Project BB:

Years 0 1 2 3
Cash flows -22,000 9,500 9,500 9,500
Cumulative cash flow -22,000 -12,500 -3,000 6,500

Payback AA = 2 + 3,000/9,500 = 2.32 years

Project CC:

Years 0 1 2 3
Cash flows -22,000 13,000 ...

#### Solution Summary

This solution is comprised of step-by-step calculation of payback period, and net present value of a project.

\$2.19