Grouper’s Custom Construction Company is considering three new projects, each re

Question

Grouper’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $23,540. Each project will last for 3 years and produce the following net annual cash flows.

The equipment’s salvage value is zero, and Grouper uses straight-line depreciation. Grouper will not accept any project with a cash payback period over 2 years. Grouper’s required rate of return is 12%.

Click here to view PV table.


(a)

Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)

Which is the most desirable project?

Which is the least desirable project?

(b)

Compute the net present value of each project. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round final answers to the nearest whole dollar, e.g. 5,275. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Which is the most desirable project based on net present value?

Which is the least desirable project based on net present value?

Year AA BB CC 1 $7,490 $10,700 $13,910 2 9,630 10,700 12,840 3 12,840 10,700 11,770 Total $29,960 $32,100 $38,520

Explanation / Answer

Solution a:

Payback period Project AA = 2 + ($23540-$17120)/12840 = 2.50 years

Payback period Project BB = 2 + ($23540-$21400)/10700 = 2.20 years

Payback period Project CC = 1 + ($23540-$13910)/12840 = 1.75 years

Most desirable project = project CC (since it has lowest payback period that means it will return the investment at earliest.

Least desirable project = Project AA

Solution b:

Most Desirable project = Project CC (Since it has highest NPV)

Least desirable Project = Project AA

Computation of Cumulative Cash Inflows Year Project AA Project BB Project CC Cash inflows Cumulative Cash Inflows Cash inflows Cumulative Cash Inflows Cash inflows Cumulative Cash Inflows 1 $7,490.00 $7,490.00 $10,700.00 $10,700.00 $13,910.00 $13,910.00 2 $9,630.00 $17,120.00 $10,700.00 $21,400.00 $12,840.00 $26,750.00 3 $12,840.00 $29,960.00 $10,700.00 $32,100.00 $11,770.00 $38,520.00

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.