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 $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? The most desirable project based on payback period is

Explanation / Answer

Payback Period = 2 + (8661/8629) = 3 years

Payback Period = 2 + (5152 / 7191) = 2.71 years

Payback Period = 2 + (835 / 7910) = 2.10 Years

2)

Based on the payback period the most desirable project is CC

Year AA Discount Factor @ 12% Discounted Cash flow Cumulative AA 1 $7070 0.893 $6314 $6314 2 9090 0.797 7245 13,559 3 12120 0.712 8629 22,188

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