Doug’s Custom Construction Company is considering three new projects, each requi
ID: 2725047 • Letter: D
Question
Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $21,850. 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%.
Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)
AA _____ years
BB ______ years
CC_______ 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 sign preceding the number e.g. -45 or parentheses e.g. (45). Round answers to the nearest whole dollar, e.g. 5,275.)
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?
The most desirable project based on net present value is _____
Which is the least desirable project based on net present value?
The least desirable project based on net present value is _______ Year $9,315 $12,133 $15,065 11,960 12,133 11,615 3 17,365 12,133 12,765 Total $38,640 $36,399 $39,445 2,960 12,133 11,615Explanation / Answer
Cumulative Cashflow Year Project AA Project BB Project CC Project AA Project BB Project CC 1 $9,315.00 $12,133.00 $15,065.00 $9,315.00 $12,133.00 $15,065.00 2 $11,960.00 $12,133.00 $11,615.00 $21,275.00 $24,266.00 $26,680.00 3 $17,365.00 $12,133.00 $12,765.00 $38,640.00 $36,399.00 $39,445.00 Payback Period $575.00 0.03311258 Project AA - It occurs between year 2 and 3 $9,717.00 0.80087365 = 2 + (21850 - 21275) / 17365 $6,785.00 0.58415842 = 2 + 575/17365 = 2.03 years Project BB - It occurs between Year 1 and 2 = 1 + (21850 - 12133) / 11960 = 1 + 9717/12133 = 1.80 years Project CC - It occurs between Year 1 and 2 = 1 + (21850 - 15065) / 11615 = 1 + 6785/11615 = 1.58 years The most desirable project based on payback period is Project CC The least desirable project based on payback period is Project AA Cumulative Cashflow Year Project AA Project BB Project CC PV Factor @ 12% Project AA Project BB Project CC a b c d a*d b*d c*d 1 $9,315.00 $12,133.00 $15,065.00 0.89286 $8,316.99 $10,833.07 $13,450.94 2 $11,960.00 $12,133.00 $11,615.00 0.79719 $10,678.61 $10,833.07 $10,370.57 3 $17,365.00 $12,133.00 $12,765.00 0.71178 $15,504.51 $10,833.07 $11,397.36 $34,500.11 $32,499.21 $35,218.86 Less: Initial Investment $21,850.00 $21,850.00 $21,850.00 $12,650.11 $10,649.21 $13,368.86 The most desirable project based on NPV is Project CC The least desirable project based on NPV is Project BB
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.