A hypothetical problem description may be given as follows:
ADJO Prison Industries uses inmate labor to sell a variety of items. The cash f lows from these items are used to support the payment of operating costs and to generate supplemental cash flows within the prison setting. ADJO seeks to possibly expand its revenue streams via the potential of producing and selling additional furniture items. Specifically, ADJO is considering the producing and selling of futons, mattresses, chairs, sofas, and recliners as methods of obtaining its desired additional revenue streams. The expected cash f lows of these potential projects are given in Table 7.2.
Capital budgeting query: Use a spreadsheet to perform the nec- essary capital budgeting mathematical calculations. Assume that year 0 represents the investment costs that must be expended to commence project operations. Within the mathematical calculations, assume that a rate of 3.0% is applicable. Any initial investment outlay must be repaid within 6.0 years. Using each of the capital budgeting techniques separately, answer the following questions:
Which projects may be classified as acceptable, and which are unacceptable?
Table 7.2: ADJO Expected Furniture Project Cash Flows
|
Year
|
Futons
|
Mattresses
|
Sofas
|
Chairs
|
Tables
|
|
0
|
($122,295.33)
|
($110,263.44)
|
($118,171.22)
|
($106,532.78)
|
($126,358.45)
|
|
1
|
$15,295.33
|
$18,222.00
|
$20,488.00
|
$15,688.00
|
$20,465.00
|
|
2
|
$15,689.44
|
$19,575.22
|
$20,989.00
|
$16,545.00
|
$20,877.00
|
|
3
|
$16,887.22
|
$21,898.27
|
$22,772.00
|
$18,200.00
|
$22,262.00
|
|
4
|
$18,605.47
|
$22,842.00
|
$23,545.00
|
$18,623.00
|
$23,753.00
|
|
5
|
$20,223.22
|
$23,223.00
|
$25,333.22
|
$19,363.00
|
$25,222.33
|
|
6
|
$22,565.27
|
$24,588.62
|
$27,121.00
|
$20,222.00
|
$25,989.24
|
|
7
|
$25,323.22
|
$25,000.00
|
$28,656.22
|
$21,323.00
|
$26,555.14
|
Which outcome is recommended for pursuance per technique if mutual exclusion exists?
Which outcomes are recommended if three of the five projects may be funded and pursued?
Text Book: Economic and Financial Analysis for Criminal Justice Organizations By Daniel Adrian Doss, William H. Sumrall III, David H. McElreath, Don W. Jones.