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 $26,620. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $8,470 $12,100 $15,730 2 10,890 12,100 14,520 3 14,520 12,100 13,310 Total $33,880 $36,300 $43,560 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%. 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________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

(a) Simple Payback Period

AA = 2.5 Yrs; BB = 2.2 Yrs; CC = 1.82 Yrs

CC is most desirable and AA is least

(b) Net Present Value

AA = -41; BB = 2442; CC = 8474

CC is most desirable and AA is least

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