Doug\'s Custom Construction Company is considering three new projects, each requ
ID: 2477595 • Letter: D
Question
Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,220. 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. 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? 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. 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?Explanation / Answer
a.
AA
Year
Cashflow
Cum PV of cashflow
0
(22,220)
(22,220)
1
7,070
(15,150)
2
9,090
(6,060)
3
12,120
6,060
Payback period= 2+[6,060/12,120]=2+0.5=2.5 years
BB
Year
Cashflow
Cum PV of cashflow
0
(22,220)
(22,220)
1
10,100
(12,120)
2
10,100
(2,020)
3
10,100
8,080
Payback period= 2+[2,020/10,100]=2+0.2=2.2 years
CC
Year
Cashflow
Cum PV of cashflow
0
(22,220)
(22,220)
1
13,130
(9,090)
2
12,120
3,030
3
11,110
14,140
Payback period= 1+[9,090/12,120]=1+0.75=1.75 years
Project
Pay Back Period( in years)
AA
2.5
BB
2.2
CC
1.75
The most desirable project based on payback is: project CC, as it’s payback period is less than other two projects.
The least desirable project based on payback is: project AA, as it’s payback period is more than other two projects.
b.
AA
Year
Cashflow
Pv Factor @ 12%
PV
0
(22,220)
1.0000
(22,220)
1
7,070
0.8929
6,313
2
9,090
0.7972
7,246
3
12,120
0.7118
8,627
NPV
(34)
BB
Year
Cashflow
Pv Factor @ 12%
PV
0
(22,220)
1.0000
(22,220)
1
10,100
0.8929
9,018
2
10,100
0.7972
8,052
3
10,100
0.7118
7,189
NPV
2,038
CC
Year
Cashflow
Pv Factor @ 12%
PV
0
(22,220)
1.0000
(22,220)
1
13,130
0.8929
11,723
2
12,120
0.7972
9,662
3
11,110
0.7118
7,908
NPV
7,073
Project
Net Present Value
AA
-34
BB
2,038
CC
7,073
The most desirable project based on net present value: project CC, as it’s net present value is more than other two projects.
The least desirable project based on net present value is : project AA, as it’s net present value is less than other two projects.
AA
Year
Cashflow
Cum PV of cashflow
0
(22,220)
(22,220)
1
7,070
(15,150)
2
9,090
(6,060)
3
12,120
6,060
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