Doug’s Custom Construction Company is considering three new projects, each requi

Question

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $20,900. Each project will last for 3 years and produce the following net annual cash flows.

The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.) 1). AA:_______ 2). BB:_____ 3). CC:_______

Compute the net present value of each project. 4). AA:______ 5). BB:_______ 6). CC:_____

Year AA BB CC Year 1 8,910 11,605 14,410 Year 2 11,440 11,605 11,110 Year 3 16,610 11,605 12,210 Total 36,960 34,815 37,730

Explanation / Answer

NPV of all the three projects is calculated as shown below:

Each project’s payback period is computed as under:

AA Year 0 Year 1 Year 2 Year 3 Total Cash Outflow ($20,900) ($20,900) Cash Inflow $8,910 $11,440 $16,610 $36,960 Life 3 years Required Rate of Return is 12% Present Value factor 1 0.89286 0.79719 0.71178 Present Value of Cash outflow -20,900 ($20,900) Present Value of Cash inflow 7,955 9,120 11,823 $28,898 Net Present value -20,900 7,955 9,120 11,823 $7,998 BB Year 0 Year 1 Year 2 Year 3 Total Cash Outflow ($20,900) ($20,900) Cash Inflow $11,605 $11,605 $11,605 $34,815 Life 3 years Required Rate of Return is 12% Present Value factor 1 0.89286 0.79719 0.71178 Present Value of Cash outflow -20,900 ($20,900) Present Value of Cash inflow 10,362 9,251 8,260 $27,873 Net Present value -20,900 10,362 9,251 8,260 $6,973 CC Year 0 Year 1 Year 2 Year 3 Total Cash Outflow ($20,900) ($20,900) Cash Inflow $14,410 $11,110 $12,210 $37,730 Life 3 years Required Rate of Return is 12% Present Value factor 1 0.89286 0.79719 0.71178 Present Value of Cash outflow -20,900 ($20,900) Present Value of Cash inflow 12,866 8,857 8,691 $30,414 Net Present value -20,900 12,866 8,857 8,691 $9,514

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

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