Doug\'s Custom Construction Company is considering three new projects, each requ

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. 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? The most desirable project based on payback period is Which is the least desirable project? The least desirable project based on payback period is 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?

Explanation / Answer

a)Paybck Period = Number of years full cah flow covered + (Remaining cost to be covered/Total Cost)*Next Year Cash flow

Investment Cost = 25300

Most desirble is C

Leaast desirable is A

b)

Project C s the most desirable in terms of NPV

A Year Cash Flow Remaining Cost Recovery % of cash flow covered Payback Period 1 8050 17250 100% 1 2 10350 6900 100% 1 3 11500 0 60% 0.6 2.6

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