Sarasota’s Custom Construction Company is considering three new projects, each r

Question

Sarasota’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $25,300. Each project will last for 3 years and produce the following net annual cash flows.

The equipment’s salvage value is zero, and Sarasota uses straight-line depreciation. Sarasota will not accept any project with a cash payback period over 2 years. Sarasota’s required rate of return is 12%. .

(a)

Compute each project’s payback period.

(b)

Compute the net present value of each project.  

rOule Tle tollowing net annual unee cash flows. Tiew prujects, each requiring an edC Year $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 The equipment's salvage value is zero, and Sarasota uses straight-line depreciation. Sarasota Sarasota's required rate of return is 12%. Click here to view PVtable, Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) 2.47 years 2.13 Years 1.72 years Which is the most desirable project? The most desirable project based on payback period is TProjest cc v Which is the least desirable project? ojedt AA Y The least desirable project based on payback period is P nter negative amounts using either a negative sig Dound final answers to the ?e arest whole dollar, e.g. 5,275. For calculation purposes, use 5

Explanation / Answer

PAYBACK PERIOD OF PROJECT AA YEAR CASHFLOWS CUMULATIVE CASHFLOWS 0 -25300 -25300 1 8050 -17250 2 10350 -6900 3 13800 6900 Payback period: 2 years + 6900/13800 = 2.5 years PAYBACK PERIOD OF PROJECT BB: YEAR CASHFLOWS CUMULATIVE CASHFLOWS 0 -25300 -25300 1 11500 -13800 2 11500 -2300 3 11500 9200 Payback period: 2 years + 2300 /11500 = 2.20 years PAYBACK PERIOD OF PROJECT CC: YEAR CASHFLOWS CUMULATIVE CASHFLOWS 0 -25300 -25300 1 14950 -10350 2 13800 3450 3 12650 16100 Payback period: 1 year + 10350 /13800 =1.75 years Project Payback period Project AA 2.5 Project BB 2.2 Project Cc 1.75 Most Desirable project based on Pyback period is PROJECT CC. Least Desirable project based on Payback period is PROJECT AA.

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