Doug’s Custom Construction Company is considering three new projects, each requi
ID: 2486934 • Letter: D
Question
Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $27,500. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $8,750 $12,500 $16,250 2 11,250 12,500 15,000 3 15,000 12,500 13,750 Total $35,000 $37,500 $45,000 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.) AA years BB years CC years Which is the most desirable project? The most desirable project based on payback period is Project AAProject BBProject CC Which is the least desirable project? The least desirable project based on payback period is Project BBProject AAProject CC (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.) AA BB CC Which is the most desirable project based on net present value? The most desirable project based on net present value is Project AAProject CCProject BB . Which is the least desirable project based on net present value? The least desirable project based on net present value is Project BBProject AAProject CC .
Explanation / Answer
The most desirable project based on payback period is Project AA
The least desirable project based on payback period is Project CC
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 BB CC CASH INFLOW 35000 37500 45000 CASH OUTFLOW 27500 27500 27500 PAYBACK PEROID 1.27 1.36 1.64Related Questions
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