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 $29,700. Each project will last for 3 years and produce the following net annual cash flows. Year $9,450 $13,500 $17,550 2 12,150 13,500 16,200 16,200 13,500 14,850 Total $37,800 $40,500 $48,600 The equipment's salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any pro ect with a cash payback period over 2 years. Doug's required rate of return is 12% Refer the below table TABLE 3 Present Value of 1 Periods 6% 7% 8% 11% 12% 15% 4% .96154 95238 94340 0.93458 92593 91743 90909 .90090 89286 86957 92456 90703 .89000 0.87344 85734 84168 .8264581162 .79719 .75614 88900 86384 83962 0.81630 79383 .77218 .75132.73119.7117865752 .85480 82270 .79209 0.76290 .73503 .70843 68301 .82193 .78353 74726 0.71299 68058 .64993 62092 .59345 .56743 49718 79031 74622 .70496 0.66634 63017 59627 56447 .53464 50663 43233 75992 71068 66506 0.62275 58349 54703 .51316 48166 45235 37594 73069 67684 .6274 0.58201 54027 50187 46651 .70259 64461 59190 0.54393 50025 46043 42410 .39092 36061 28426 5% 10% 65873 63552 57175 43393 40388 32690

Explanation / Answer

Calculation of Cash Payback Period AA Year Cash Flow Discount cumulative 0 -29700 1.00 -29700 -29700.00 1 9450 0.89 8437.50 -21262.50 2 12150 0.80 9685.91 -11576.59 3 16200 0.71 11530.84 -45.75 BB Year Cash Flow Discount cumulative 0 -29700 1.00 -29700 -29700.00 1 13500 0.89 12053.57 -17646.43 2 13500 0.80 10762.12 -6884.31 3 13500 0.71 9609.03 2724.72 Payback Period 2+6884/9609 2.7 byears CC Year Cash Flow Discount cumulative 0 -29700 1.00 -29700 -29700.00 1 17550 0.89 15669.64 -14030.36 2 16200 0.80 12914.54 -1115.82 3 14850 0.71 10569.94 9454.12 2+1115/10569 2.1 year The most desirable project is CC and the least desirable is AA

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