Doug’s Custom Construction Company is considering three new projects, each requi

Question

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,220. 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.

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.)

Year AA BB CC 1 $7,070 $10,100 $13,130 2 9,090 10,100 12,120 3 12,120 10,100 11,110 Total $28,280 $30,300 $36,360

Explanation / Answer

Project AA Year Cash flows PV factor Present value 1 7070 0.89286 6313 2 9090 0.79719 7246 3 12120 0.71178 8627 Total 22186 Investment 22220 Net present value -34 Project BB Year Cash flows PV factor Present value 1 10100 0.89286 9018 2 10100 0.79719 8052 3 10100 0.71178 7189 Total 24258 Investment 22220 Net present value 2038 +1 Project CC Year Cash flows PV factor Present value 1 13130 0.89286 11723 2 12120 0.79719 9662 3 11110 0.71178 7908 Total 29293 Investment 22220 Net present value 7073

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