Doug’s Custom Construction Company is considering three new projects, each requi

Question

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,440. 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%. Click here to view PV table.

(a)

Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)

Which is the most desirable project?

Which is the least desirable project?

(b)

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?

Which is the least desirable project based on net present value?

Year AA BB CC 1 $7,140 $10,200 $13,260 2 9,180 10,200 12,240 3 12,240 10,200 11,220 Total $28,560 $30,600 $36,720 Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,440. Each project will last for 3 years and produce the following net annual cash flows YearAA 1 $7,140 $10,200 $13,260 9,180 10,200 12,240 12,240 10,200 11,220 $28,560 $30,600 $36.720 2 Total 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%. ClickheretoviewPytable. Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) years years years Which is the most desirable project? The most desirable project based on payback period is

Explanation / Answer

Revenue for 3 Years Year AA Cumulative Cash inflow BB CC 0 $            (22,440) $     (22,440) $            (22,440) $ (22,440) $            (22,440) $ (22,440) 1 $                 7,140 $     (15,300) $              10,200 $ (12,240) $              13,260 $   (9,180) 2 $                 9,180 $        (6,120) $              10,200 $   (2,040) $              12,240 $      3,060 3 $              12,240 $          6,120 $              10,200 $      8,160 $              11,220 $   14,280 Total $              28,560 $              30,600 $              36,720 Investment $              22,440 $              22,440 $              22,440 Pay Back Period for all the Projects Previous Year in which Cumulative Cash flow comes in Positive 2 2 1 -0.5 -6 -0.2 -2.4 -0.75 -9 Total Pay Back Period 2 Year 6 Months 2 Year 2.4 Months 1 Year9 Months Most Desirable Project Since Pay back period is early in Option3 , Option 3 is feasible Least Desirable Project Since Pay back period is more in Option1 , Option 1 is least desirable NPV + Present Value of future cash flows - Initial Investment Cash Flows AA BB CC Year 1 $                 7,140 $              10,200 $              13,260 Year 2 $                 9,180 $              10,200 $              12,240 Year 3 $              12,240 $              10,200 $              11,220 Discounting Factor @ 12% Year 1 0.892857143 0.892857143 0.892857143 Year 2 0.797193878 0.797193878 0.797193878 Year 3 0.711780248 0.711780248 0.711780248 Discounted Cash Inflows Year 1 $                 6,375 $                 9,107 $              11,839 Year 2 $                 7,318 $                 8,131 $                 9,758 Year 3 $                 8,712 $                 7,260 $                 7,986 Total Cash Inflow $              22,405 $              24,499 $              29,583 Initial Investment $              22,440 $              22,440 $              22,440 NPV $                    (35) $                 2,059 $                 7,143 Most desirable Project CC Least desirable Project AA

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