oug’s Custom Construction Company is considering three new projects, each requir
ID: 2494553 • Letter: O
Question
oug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. 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.
(a)
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?
(b)
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?
Which is the least desirable project based on net present value?
Explanation / Answer
AA PBP Time Amount Cumulative - (22,000.00) (22,000.00) 1.00 7,000.00 (15,000.00) 2.00 9,000.00 (6,000.00) 3.00 12,000.00 6,000.00 PBP= 2 + 60000/12000 = 2.5 Years BB PBP Time Amount Cumulative - (22,000.00) (22,000.00) 1.00 10,000.00 (12,000.00) 2.00 10,000.00 (2,000.00) 3.00 10,000.00 8,000.00 PBP= 2 + 2000/10000 PBP= 2.20 Years CC PBP Time Amount Cumulative - (22,000.00) (22,000.00) 1.00 13,000.00 (9,000.00) 2.00 12,000.00 3,000.00 3.00 11,000.00 14,000.00 PBP= 1+ 9000/12000 PBP= 1.75 Years Most Desirable based on PBP is CC Least Desirable based on PBP is AA Statemnet showing Cash flows AA BB CC Particulars Time PVf@12% Amount PV Amount PV Amount PV Cash Outflows - 1.00 (22,000.00) (22,000.00) (22,000.00) (22,000.00) (22,000.00) (22,000.00) PV of Cash outflows (22,000.00) (22,000.00) (22,000.00) Cash inflows 1.00 0.8929 7,000.00 6,250.00 10,000.00 8,928.57 13,000.00 11,607.14 Cash inflows 2.00 0.7972 9,000.00 7,174.74 10,000.00 7,971.94 12,000.00 9,566.33 Cash inflows 3.00 0.7118 12,000.00 8,541.36 10,000.00 7,117.80 11,000.00 7,829.58 PV of Cash Inflows 21,966.11 24,018.31 29,003.05 NPV (33.89) 2,018.31 7,003.05 Most Desirable based on NPV is CC Least Desirable based on NPV is AA
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