Exercise 24-2 Doug\'s Custom Construction Company is considering three new proje

Question

Exercise 24-2 Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,610. Each project will last for 3 years and produce the following net annual cash flows ear $9,639 $12,555 $15,589 12,376 12,555 12,019 17,969 12,555 13,209 Total $39,984 $37,665 $40,817 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%. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) years years 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 LINK TO TEXT

Explanation / Answer

As The Net cash flows are given it is assumed that depreciaion cash flow is inclusive, not separately considered. Payback & NPV Project AA Project BB Project BB Year PV Factor @ 12% Investment Net Cash inflow Net Cash flow PV of Net Cash flows Investment Net Cash inflow Net Cash flow PV of Net Cash flows Investment Net Cash inflow Net Cash flow PV of Net Cash flows Year 0        1.00000     (22,610)        (22,610)    (22,610.00)    (22,610)    (22,610)    (22,610.0)     (22,610)    (22,610) (22,610.0) Year 1        0.89286           9,639            9,639         8,606.25     12,555      12,555      11,209.8      15,589      15,589     13,918.8 Year 2        0.79719         12,376          12,376         9,866.07     12,555      12,555      10,008.8      12,019      12,019        9,581.5 Year 3        0.71178         17,969          17,969       12,789.98     12,555      12,555        8,936.4      13,209      13,209        9,401.9         8,652.30        7,545.0     10,292.1 Payback Period years               2.03           1.80           1.58 Projects   Details   AA BB CC NPV $ 8,652.3 $   7,545.0 $ 10,292.1 Payback Periods -Years            2.03             1.80               1.58 Considering Payback,Project CC is the most desirable & AA is the least desirable. Considering NPV, Project CC is the most desirable & BB is the least desirable.

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