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 $25,960. 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%. 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 $8,260 $11,800 $15,340 2 10,620 11,800 14,160 3 14,160 11,800 12,980 Total $33,040 $35,400 $42,480

Explanation / Answer

Payback Period AA Year Cash Flow Total Discount Cash Flow 0 -25960 -25960 1 -25960 1 8260 -17700 0.892857 7375 2 10620 -7080 0.797194 8466.199 3 14160 7080 0.71178 10078.81 NPV -39.9927 Payback Period = 2+7080/14160 2.5 years BB Year Cash Flow Total Discount Cash Flow 0 -25960 -25960 1 -25960 1 11800 -14160 0.892857 10535.71 2 11800 -2360 0.797194 9406.888 3 11800 9440 0.71178 8399.007 NPV 2381.609 Payback Period = 2+2360/11800 2.2 YEARS cc Year Cash Flow Total Discount Cash Flow 0 -25960 -25960 1 -25960 1 15340 -10620 0.892857 13696.43 2 14160 3540 0.797194 11288.27 3 12980 16520 0.71178 9238.908 NPV 8263.601 Payback Period = 1+10620/14160 1.75 Years The most desireable is CC and least desirable is AA ON NPV is CC and least desirable is AA

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