Question
The Bar-None Manufacturing Co. manufactures fence panels used in cattle feed lots throughout the Midwest. Bar-None's management is considering three investment projects for next year
The Bar-None Manufacturing Co. manufactures fence panels used in cattle feed lots 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's initial investment. The cash flows for the three projects (Project A, Project B, and Project C) are as follows:
a.Given Bar-None's three-year payback period, which of the projects will qualify 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.If Bar-None uses a discount rate of 10.0 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 the firm undertake?
| Year | Project A | Project B | Project C |
|
| 0 | $(1,000) | $(10,000) | $(5,000) | |
| 1 | 600 | 5,000 | 1,000 | |
| 2 | 300 | 3,000 | 1,000 | |
| 3 | 200 | 3,000 | 2,000 | |
| 4 | 100 | 3,000 | 2,000 | |
| 5 | 500 | 3,000 | 2000 |
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Managerial Accounting
Authors: Ray Garrison, Eric Noreen, Peter Brewer
17th Edition
1260247783, 978-1260247787
