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 $26,180. 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 $8,330 $11,900 $15,470 2 10,710 11,900 14,280 3 14,280 11,900 13,090 Total $33,320 $35,700 $42,840

Explanation / Answer

Payback period

Project A                     = 2.5 years

Project B                    = 2.2 years

Project C                    = 1.75 years

Desirable project – C

Undesirable project A

Net present value

Project A

Initial investment                                       -26,180

8,330* .89286                                                7,438

10,710 *.79719                                             8,538

14,280*.71,178                                           10,164

Net present value                                             -40

Project B

Initial investment                                        -26,180

11,900*.89286                                              10,625

11,900*.79,719                                               9,487

11,900*.71,178                                              8,470

Net present value                                         2,402

Project c

Initial investment                                          -26,180

15,470*.89286                                                13,813

14,280*.79719                                                 11,384

13,090*.71,178                                                  9,317

Net present value                                             8,334

Project C most desirable

Least desirable A

Payback period

Project A                     = 2.5 years

Project B                    = 2.2 years

Project C                    = 1.75 years

Desirable project – C

Undesirable project A

Net present value

Project A

Initial investment                                       -26,180

8,330* .89286                                                7,438

10,710 *.79719                                             8,538

14,280*.71,178                                           10,164

Net present value                                             -40

Project B

Initial investment                                        -26,180

11,900*.89286                                              10,625

11,900*.79,719                                               9,487

11,900*.71,178                                              8,470

Net present value                                         2,402

Project c

Initial investment                                          -26,180

15,470*.89286                                                13,813

14,280*.79719                                                 11,384

13,090*.71,178                                                  9,317

Net present value                                             8,334

Project C most desirable

Least desirable A

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