Carla Vista's Custom Construction Company is considering three new projects, each requiring an equipment investment of $23,980. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB Cc 1 $7,630 $10,900 $14,170 9,810 10,900 13,080 3 13,080 10,900 11,990 Total $30,520 $32,700 $39,240 The equipment's salvage value is zero, and Carla Vista uses straight-line depreciation. Carla Vista will not accept any project with a
Carla Vista's Custom Construction Company is considering three new projects, each requiring an equipment investment of $23,980. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB Cc 1 $7,630 $10,900 $14,170 9,810 10,900 13,080 3 13,080 10,900 11,990 Total $30,520 $32,700 $39,240 The equipment's salvage value is zero, and Carla Vista uses straight-line depreciation. Carla Vista will not accept any project with a
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Computing
### Task:
**(a) Calculate each project’s payback period.**
The payback period is the time it takes for the initial investment to be recovered from the project's net cash flows.
For Project AA, the payback period is already calculated as:
**AA: 2.35 years**
**Note**: Remember to round your answers to 2 decimal places (e.g., 15.25).
---
**How to Compute the Payback Period:**
To calculate the payback period, you need to accumulate the project's cash inflows until they equal the initial investment. For project AA, this calculation has been provided:
1. Year 1: $7,630
2. Year 2: $9,810
3. Year 3: $13,080
Sum up the cash flows until their total equals the initial investment ($23,980).
### Explanation of the Provided Data:
**Table of Cash Flows:**
The table lists the net annual cash flows for three different projects (AA, BB, CC) over three years. The total accumulated cash flow for each project is](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fed6abf1a-d092-442d-b146-02da232cfdf3%2Fc194eeb8-bfaa-4de7-9069-7c64d0892f65%2F9nag5t_processed.png&w=3840&q=75)
Transcribed Image Text:**Carla Vista’s Custom Construction Company Case Study: Project Evaluation**
Carla Vista’s Custom Construction Company is evaluating three potential projects. Each project requires an initial equipment investment of $23,980. The projects are expected to last for 3 years and generate the following net annual cash flows:
| **Year** | **AA** | **BB** | **CC** |
|----------|---------|---------|----------|
| 1 | $7,630 | $10,900 | $14,170 |
| 2 | $9,810 | $10,900 | $13,080 |
| 3 | $13,080 | $10,900 | $11,990 |
| **Total**| $30,520 | $32,700 | $39,240 |
**Salvage Value and Depreciation**
The salvage value of the equipment for the projects is zero. Carla Vista uses straight-line depreciation, meaning the value of the equipment decreases evenly over the project’s lifespan.
**Acceptance Criteria and Rate of Return**
Carla Vista will not accept any project with a cash payback period exceeding 2 years. Additionally, the required rate of return for evaluating the projects is set at 12%.
> [Click here to view PV table.](#)
### Task:
**(a) Calculate each project’s payback period.**
The payback period is the time it takes for the initial investment to be recovered from the project's net cash flows.
For Project AA, the payback period is already calculated as:
**AA: 2.35 years**
**Note**: Remember to round your answers to 2 decimal places (e.g., 15.25).
---
**How to Compute the Payback Period:**
To calculate the payback period, you need to accumulate the project's cash inflows until they equal the initial investment. For project AA, this calculation has been provided:
1. Year 1: $7,630
2. Year 2: $9,810
3. Year 3: $13,080
Sum up the cash flows until their total equals the initial investment ($23,980).
### Explanation of the Provided Data:
**Table of Cash Flows:**
The table lists the net annual cash flows for three different projects (AA, BB, CC) over three years. The total accumulated cash flow for each project is
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