Doug’s Custom Construction Company is considering three new projects, each requi
ID: 2472937 • Letter: D
Question
Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $25,300. Each project will last for 3 years and produce the following net annual cash flows.Year AA BB CC 1 $8,050 $11,500 $14,950 2 10,350 11,500 13,800 3 13,800 11,500 12,650 Total $32,200 $34,500 $41,400
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.)
AA years BB years CC years
Which is the most desirable project?
The most desirable project based on payback period is
Which is the least desirable project?
The least desirable project based on payback period is
(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.)
AA BB CC
Which is the most desirable project based on net present value?
The most desirable project based on net present value is .
Which is the least desirable project based on net present value?
The least desirable project based on net present value is .
Explanation / Answer
Year Cash Flow (AA) Cumulative Cash Flow (AA) Cash Flow (BB) Cumulative Cash Flow (BB) Cash Flow (CC) Cumulative Cash Flow (CC) 0 $ (25,300.00) $ (25,300.00) $ (25,300.00) $ (25,300.00) $ (25,300.00) $ (25,300.00) 1 $ 8,050.00 $ (17,250.00) $ 11,500.00 $ (13,800.00) $ 14,950.00 $ (10,350.00) 2 $ 10,350.00 $ (6,900.00) $ 11,500.00 $ (2,300.00) $ 13,800.00 $ 3,450.00 3 $ 13,800.00 $ 6,900.00 $ 11,500.00 $ 9,200.00 $ 12,650.00 $ 16,100.00 Payback period 2+(6900/13800) 2+(2300/11500) 1+(10350/13800) Payback period 2.5 2.2 1.75 The most desirable project based on payback period is PROJECT CC because it has the lowest payback period of 1.75 year The least desirable project based on payback period is PROJECT AA because it has the Highest payback period of 2.5 year Year Cash Flow (AA) Cash Flow (BB) Cash Flow (CC) PV factor with 12% discount rate= (1 / (1 + r)^n) Present Value of Cash Flow (AA) Present Value of Cash Flow (BB) Present Value of Cash Flow (CC) 0 $ (25,300.00) $ (25,300.00) $ (25,300.00) 1.00000 $ (25,300) $ (25,300) $ (25,300) 1 $ 8,050.00 $ 11,500.00 $ 14,950.00 0.89286 $ 7,188 $ 10,268 $ 13,348 2 $ 10,350.00 $ 11,500.00 $ 13,800.00 0.79719 $ 8,251 $ 9,168 $ 11,001 3 $ 13,800.00 $ 11,500.00 $ 12,650.00 0.71178 $ 9,823 $ 8,185 $ 9,004 NPV $ (39) $ 2,321 $ 8,054 The most desirable project based on net present value is PROJECT CC because it has the Highest NPV of $8054 The least desirable project based on net present value is PROJECT AA because it has the Lowest NPV of $-39
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.