Doug\'s Custom Construction Company is considering three new projects, each requ
ID: 2487403 • Letter: D
Question
Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $19,380. 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 the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) 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? 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 answers to the nearest whole dollar, e.g. 5,275.) Which is the most desirable project based on net present value? Which is the least desirable project based on net present value?Explanation / Answer
Answer
1
a)
b)
Project CC is most desirable project as per payback period
c)
Project AA is least desirable project as per payback period
2
a)
b)
Project CC is most desirable project as per NPV
c)
Project BB is least desirable project as per NPV
Working
Annual Depreciation = (Cost-Salvage Value)/Useful life
Annual Depreciation = (19380-0)/3
Annual Depreciation = 6460
AA)
Payback Period = 1+ 4658/17068
Payback Period = 1.27 Years
NPV = 22,932.06
BB)
Payback Period = 1+ 2159/17221
Payback Period = 1.13 Years
NPV = 21,981.91
cc)
Payback Period = 19380/19822
Payback Period = 0.98Years
NPV = 24,337.64
AA 1.27 Years BB 1.13 Years CC 0.98 YearsRelated Questions
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