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 $24,420. 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.) 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 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? The least desirable project based on net present value is I

Explanation / Answer

Dough's Custome constructioin Payback & NPV Details Project AA Project BB Project CC Year PV Factor @12% Cash Flows PV of Cash flows=PV vfactor* Cash Flows Cash Flows PV of Cash flows=PV vfactor* Cash Flows Cash Flows PV of Cash flows=PV vfactor* Cash Flows Year 0                   1.0000              (24,420)              (24,420)     (24,420.00)       (24,420.00)       (24,420.00)       (24,420.00) Year 1                   0.8929                  7,770                   6,938             11,100           9,910.71         14,430.00         12,883.93 Year 2                   0.7972                  9,990                   7,964             11,100           8,848.85         13,320.00         10,618.62 Year 3                   0.7118                13,320                   9,481             11,100           7,900.76         12,210.00           8,690.84 NPV =                 (37.62)           2,240.33           7,773.39 Pay Back period in Years=                     2.50                  2.20                    1.75 AA BB CC   a Payback Periods in Years                       2.50                     2.20                     1.75 CC is the most desirable project AA BB CC   b NPV of Projects $              (37.62) $        2,240.33 $         7,773.39 Project CC is the most desirable project. Project AA is the least desirable project.

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