Doug’s Custom Construction Company is considering three new projects, each requi
ID: 2795206 • Letter: D
Question
Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,880. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $7,280 $10,400 $13,520 2 9,360 10,400 12,480 3 12,480 10,400 11,440 Total $29,120 $31,200 $37,440 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 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.)
Explanation / Answer
Calculation of NPV:-
Project AA
Particulars
Project AA
Disc. Factor
Project AA
Cash Flow Y1
7,280
0.89286
6,500
Cash Flow Y2
9,360
0.79719
7,462
Cash Flow Y3
12,480
0.71178
8,883
Total
22,845
Initial Investment
(22,880)
1.00
(22,880)
NPV (35)
Project BB
Particulars
Project BB
Disc. Factor
Project BB
Cash Flow Y1
10,400
0.89286
9,286
Cash Flow Y2
10,400
0.79719
8,291
Cash Flow Y3
10,400
0.71178
7,403
Total
24,979
Initial Investment
(22,880)
1.00
(22,880)
NPV 2,099
Project CC
Particulars
Project CC
Disc. Factor
Project CC
Cash Flow Y1
13,520
0.89286
12,071
Cash Flow Y2
12,480
0.79719
9,949
Cash Flow Y3
11,440
0.71178
8,143
Total
30,163
Initial Investment
(22,880)
1.00
(22,880)
NPV 7,283
Particulars
Project AA
Disc. Factor
Project AA
Cash Flow Y1
7,280
0.89286
6,500
Cash Flow Y2
9,360
0.79719
7,462
Cash Flow Y3
12,480
0.71178
8,883
Total
22,845
Initial Investment
(22,880)
1.00
(22,880)
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