Question

(Payback and discounted payback period calculations) The Bar None Manufacturing Co manufactures fence panels used in cattle feed for throughout the Midwest Bar None's management is considering three investment projects for next year but doesn't want to make any investment that requires more than three years to recover the firm'sini Investment. The cash flows for the three projects Project A, Project, and Project C) are as follows: a. Given Bar None's three year payback period, which of the projects will quality for acceptance? b. Rank the three projects using their payback period. Which project looks the best using this criterion? Do you agree with this ranking? Why or why not? c. Bar-Nene uses a discount rate of 0.7 percent to analyze projects, what is the discounted payback period for each of the three projects? If the firm still maintains its three year payback policy for the discounted payback, which projects should e foundertak a. Given the cash low information in the table, the payback period of Project Aid 2.20 years. (Round to two decimal places the firm requires a 3-year payback before an investment can be accepted the firm should accept Project A because its payback period is less than or equal to the maximum acceptable payback period. Select from the drop-down menus.) The payback period of Project Bis 2.80 years. (Round to two decimal places) the firm requires a year payback before an investment can be accepted the firm should accept Project because its payback period is less than or equal to the maximum acceptable payback period (telefon the drop down menus) The payback period of Project 20 years Round to two decimal places the firm requires 3-year payback before an investment can be accepted, the firm should scompt Project because its payback period is less than or equal to the maximum acceptable payback period. (Select from the drop down menus) b. Rank the three projects using the payback period The project with the shortest payback period is Project. The project the second shortest payback period is Project. The project with the longest payback period in Project payback chroni Proj e ct from the drop-down menus) Do you agree with this taking? Why why not? (Select the best choice below) . Therefore the project which looks best using the

Answer 1

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W ºvoca ax 3 ENG 10:36 18-04-2020 ... X : fix x BN BO BP BQ BR BS BT BU BV B W B A BQ607 BM 584 585 586 587 588 589 a 590 591 592 593 594 595 2.29 ACCEPT THAN OR EQUAL TO 2.80 ACCEPT THAN OR EQUAL TO 596 2.97 ACCEPT THAN OR EQUAL TO 597 598 b 599 SHORTEST PAYBACK SECOND SHORTEST PAYBACK LONGEST PAYBACK PROJECT A PROJECT B PROJECT C 600 601 BEST PROJECT A 602 603 604 605 606 607 coo RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND ... + : 1

W ºvoca ax 3 ENG 10:36 18-04-2020 ... X BQ372 BM BP _ BQ BR BS BT BU BV B W BA : x BN BO PROJECT A PAYBACK PERIOD (PBP) YEAR CFAT CCFAT 4 372 373 374 375 376 377 378 379 -1100 -1100 90 2 350 -50 700 -400 3 170 120 5 450 660 210 PBP = 2 + CCFAT2/CFAT3 = 2 + (50/170) = 2.29 YEARS 380 381 382 383 PROJECT B PAYBACK PERIOD (PBP) YEAR CFAT CCFAT 3 45 -10500 -10500 6000 -4500 2500 -2000 2500 500 384 2500 3000 2500 5500 385 PBP = 2 + CCFAT2/CFAT3 = 2 + (2000/2500) = 2.80 YEARS (IGNORE NEGATIVE SIGN OF CCFAT) 386 387 388 389 390 391 PROJECT C PAYBACK PERIOD (PBP) YEAR CFAT CCFAT 0 -7000 -7000 1800 1800 -5200 3 3500 100 4 3500 3600 5 3500 7100 -3400 392 393 394 395 200 PBP = 2 + CCFAT2/CFAT3 = 2 + (3400/3500) = RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta 2.97 YEARS (IGNORE NEGATIVE SIGN OF CCFAT) RELEVANT MI-np-ir NPV | BETA LEVERED REPLACEMENT BOND ... Đ : HPR GMAM EAC MACRS |

W ºvoca ax 3 ENG 10:36 18-04-2020 ... X - fix B5409 - 396 x BN BM BO BP BQ BR BS BT BU BV BW B) 397 а ALL 3 PROJECT QUALIFY FOR ACCEPTANCE b RANK PAYBACK PERIOD PROJECT 2.29 PROJECT A 2.80 PROJECT B 2.97 PROJECT C ω ΝΗ 398 399 400 401 402 403 404 405 406 407 PROJECT A IS BEST NO, PAYBACK PERIOD DOES NOT TAKE INTO ACCOUNT ALL YEARS CASHFLOWS SECONDLY, IT DOES NOT TAKE INTO ACCOUNT TIME VALUE OF MONEY SO THE RANKINGS ARE NOT RELIABLE * DO NOT AGREE 408 4091 5 90 410 DISCOUNTED PAYBACK PERIOD 411 PROJECT A 412 YEAR 1 2 413 CFAT -1100 700 350 414 PV FACTOR AT 9.7% 0.9116 0.8310 415 DISCOUNTED CFAT -1100 638.10 290.84 416 DISCOUNTED CCFAT -1100 -461.90 -171.06 417 418 DPBP = 3 + CCFAT3/CFAT4 = 3+ (42.28/62.15) = 419 wa RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta HPR GMAM EAC MACRS 3 170 0.7575 128.77 -42.28 FORMULA (1/(1+0.097)^n 0.6905 62.15 19.87 450 0.6295 283.26 303.12 3.68 YEARS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND ... • : |

W ºvoca ax 3 ENG 10:36 18-04-2020 ... X BS442 BT BU BV BW B) 5 2500 0.6295 1573.65 2240.57 - BM BN BO BP BQ BR BS 419 420 PROJECT B 421 YEAR 2 3 4 422 CFAT -10500 6000 2500 2500 2500 423 PV FACTOR AT 9.7% 0.9116 0.8310 0.7575 0.6905 424 DISCOUNTED CFAT -10500 5469.46 2077.43 1893.74 1726.29 425 DISCOUNTED CCFAT -10500 -5030.54 -2953.11 -1059.37 666.92 426 427 DPBP = 3 + CCFAT3/CFAT4 = 3 + (1059.37/1726.29) = 3.61 YEARS 428 429 430 PROJECT C 431 YEAR 4 432 CFAT -7000 1800 1800 3500 3500 433 PV FACTOR AT 9.7% 0.9116 0.8310 0.7575 0.6905 434 DISCOUNTED CFAT -7000 1640.84 1495.75 2651.23 2416.80 435 DISCOUNTED CCFAT -7000 -5359.16 -3863.41 -1212.18 1204.63 436 437 DPBP = 3 + CCFAT3/CFAT4 = 3+ (1212.18/2416.80) = 3.50 YEARS 438 439 440 USING DISCOUNTED PAYBACK PERIOD NONE IS SELCTED 441 ALL HAVE PAYBACK PERIOD MORE THAN 3 YEARS 442 RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta HPR GMAM EAC MACRS RELEVANT MI-np-ir N 3500 0.6295 2203.10 3407.73 ICAIINIT NA TAAI ALATI ATVIA LAILA AnalA NPV BETA LEVERED REPLACEMENT BOND ... • : |