(a) (b) Doug’s Custom Construction Company is considering three new projects, ea
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Question
(a)
(b)
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.Year AA BB CC 1 $9,315 $12,133 $15,065 2 11,960 12,133 11,615 3 17,365 12,133 12,765 Total $38,640 $36,399 $39,445
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 the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Explanation / Answer
AA
Year
Cash flow
Cum Cash Flow
0
$ (21,850)
$ (21,850)
1
$ 9,315
$ (12,535)
2
$ 11,960
$ (575)
3
$ 17,365
$ 16,790
Payback Period = 2+575/17,365
=2+0.03
=2.03 years
BB
Year
Cash flow
Cum CashFlow
0
$ (21,850)
$ (21,850)
1
$ 12,133
$ (9,717)
2
$ 12,133
$ 2,416
3
$ 12,133
$ 14,549
Payback Period = 1+9,717/12,133
=1+0.80
=1.80 years
CC
Year
Cash flow
Cum CashFlow
0
$ (21,850)
$ (21,850)
1
$ 15,065
$ (6,785)
2
$ 11,615
$ 4,830
3
$ 12,765
$ 17,595
Payback Period = 1+6,785/11,615
=1+0.58
=1.58 years
Project
Payback Period
Project AA
2.03
years
Project BB
1.8
years
Project CC
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
AA
Year
CashFlow
PV Factor@ 12%
PV
0
(21,850)
1.0000
(21,850)
1
9,315
0.8929
8,317
2
11,960
0.7972
9,534
3
17,365
0.7118
12,360
NPV
8,361
BB
Year
Cash Flow
PV Factor@ 12%
PV
0
(21,850)
1.0000
(21,850)
1
12,133
0.8929
10,833
2
12,133
0.7972
9,672
3
12,133
0.7118
8,636
NPV
7,291
CC
Year
Cash Flow
PV Factor@ 12%
PV
0
(21,850)
1.0000
(21,850)
1
15,065
0.8929
13,451
2
11,615
0.7972
9,259
3
12,765
0.7118
9,086
NPV
9,946
Project
NPV
Project AA
8,361
Project BB
7,291
Project CC
9,946
The most desirable project based on net present value is : Project CC
The least desirable project based on net present value is : Project AA
AA
Year
Cash flow
Cum Cash Flow
0
$ (21,850)
$ (21,850)
1
$ 9,315
$ (12,535)
2
$ 11,960
$ (575)
3
$ 17,365
$ 16,790
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