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 $26,400. 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. 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. 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 least desirable project based on net present value is

Explanation / Answer

Calculation of the payback period AA Year 0 -26400 -26400 1 8400 -18000 2 10800 -7200 3 14400 7200 NPV 7200 Payback Period = 2+7200/14400 Payback Period = 2.5 years BB Year 0 -26400 -26400 1 12000 -14400 2 12000 -2400 3 12000 9600 NPV 9600 Payback Period = 2+2400/12000 Payback Period = 2.2 years CC Year 0 -26400 -26400 1 15600 -10800 2 14400 3600 3 13200 16800 NPV 16800 Payback Period = 1+10800/14400 Payback Period = 1.75 YEARS The most desirable project is project CC The least desirable project is project AA

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