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 $22,000. Each project will last for 3 years and produce the following net annual cash flows. Year $7,000 $10,000 $13,000 9,000 10,000 12,000 12,000 10,000 11,000 Total $28,000 $30,000 $36,000 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 each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) years years 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 Compute the net present value of each project. (Enter negative amounts using either a negative sion 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? The most desirable project based on net present value is Which is the least desirable project based on net present value?

Explanation / Answer

1. payback period

initial investment in all 3 projects = $ 22000

payback period :

AA : completed years + remaining amount /next year cash inlow

= 2 years + (22000 - 16000) / 12000

= 2 + 0.5

= 2.5 years

BB: = 2 years + (22000 - 20000) / 10000

= 2.2 years

CC: = 1 year + (22000 - 13000)/ 12000

= 1.75 years

most desirable project on basis of payback period = CC

less desirable project on basis of payback period = AA

2. NPV

AA:

BB

CC

Most desiirable project based on NPV = CC

least desirable project based on NPV = AA

aa bb cc cash inflow cumulative cash inflow cash inflow cumulative cash inflow cash inflow cumulative cash inflow 1 7000 7000 10000 10000 13000 13000 2 9000 16000 10000 20000 12000 25000 3 12000 28000 10000 30000 11000 36000

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