Sarasota Custom Construction Company Is Considering Three New Projects, each req

Question

Sarasota Custom Construction Company Is Considering Three New Projects, each requiring an equipment investment of $25,000. Each project will last for 3 Years and Produce The Following Net Annual Cash Flows.

The Equipment Salvage Value Is Zero, & Sarasota Uses Straight-line Depreciation. Sarasota Will Not Accept Any Project With A Can Period Over 2 Years. Sarasota's Required Rate of Return Is 12%.

(A) Compute Each Project's Payback Period.
AA-
BB-
CC-

Which Is Most Desirable? Which Is Least Desirable?

(B) Compute the Net Present Value of Each Project

AA-
BB-
CC-

Which Is Most Desirable Project? Which Is Least Disirable?

RESOURCES work Exercise 16-2 Sarasota's Custom Construction Company is considering three new proje Year iew 16-3 6-9 16-11 6-3 ? 1$8,050 $11,500 $14,950 2 10,350 11,500 13,800 3 13,800 11,500 12,650 Total $32,200 $34,500 $41,400 re ults by ctive The equipment's salvage value is zero, and Sarasota uses straight-ine deprediation, Sarasota Click here to view Py table. Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) years 8B 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 t present value of each project. (Enter negative amounts using either a negatiu decimal places as displaved in the factor table prov Cc Which is the most desirable project based on net present value? The most desirable project based on net present value i which is the least desirable project based on net present value The least desirable project based on net present value is

Explanation / Answer

(a).

Pack back period for project (AA) = 2.48 years

Pack back period for project (BB) = 2.17 years

Pack back period for project (CC) = 1.73 years

Explanation;

For project (AA):

Period

Cash flow

Accumulated cash flow

0

($25000)

($25000)

1

$8050

($16950)

2

$10350

($6600)

3

$13800

$7200

So pack back period will be as follow;

2 + ($6600 / $13800)

2 + 0.48 = 2.48 years

For project (BB):

Period

Cash flow

Accumulated cash flow

0

($25000)

($25000)

1

$11500

($13500)

2

$11500

($2000)

3

$11500

$9500

So pack back period will be as follow;

2 + ($2000 / $15000)

2 + 0.17 = 2.17 years

For project (CC):

Period

Cash flow

Accumulated cash flow

0

($25000)

($25000)

1

$14950

($10050)

2

$13800

$3750

3

$12650

$16400

So pack back period will be as follow;

1 + ($10050 / $13800)

1 + 0.73 = 1.73 years

Project CC is most desirable on payback period basis.

Project AA is least desirable on payback period basis.

(b).

Net present value for project (AA) = 261.03

Net present value for project (BB) = $2621.06

Net present value for project (CC) = $8353.51

Explanation;

For project (AA):

Period

Cash flow

Discounting factor @ 12%

Discounted cash flow

0

($25000)

1

($25000)

1

$8050

(1 + 0.12)1

$7187.50

2

$10350

(1 + 0.12)2

$8250.96

3

$13800

(1 + 0.12)3

$9822.57

Net present value (NPV) of project AA

$261.03

For project (BB):

Period

Cash flow

Discounting factor @ 12%

Discounted cash flow

0

($25000)

1

($25000)

1

$11500

(1 + 0.12)1

$10267.86

2

$11500

(1 + 0.12)2

$9167.73

3

$11500

(1 + 0.12)3

$8185.47

Net present value (NPV) of project BB

$2621.06

For project (CC):

Period

Cash flow

Discounting factor @ 12%

Discounted cash flow

0

($25000)

1

($25000)

1

$14950

(1 + 0.12)1

$13348.21

2

$13800

(1 + 0.12)2

$11001.28

3

$12650

(1 + 0.12)3

$9004.02

Net present value (NPV) of project CC

$8353.51

Project CC is most desirable on NPV basis.

Project AA is least desirable on NPV basis.

Period

Cash flow

Accumulated cash flow

0

($25000)

($25000)

1

$8050

($16950)

2

$10350

($6600)

3

$13800

$7200

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