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 $23,320. 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 $7,420 $10,600 $13,780 2 9,540 10,600 12,720 3 12,720 10,600 11,660 Total $29,680 $31,800 $38,160

Explanation / Answer

(a)

initial investment for all the three project is $ 23320

The payback period is the time required for the amount invested in an asset to be repaid by the net cash outflow generated by the asset. It is a simple way to evaluate the risk associated with a proposed project.

Project AA:

Payback period = 2 + (23320 - 16960) / (29680 - 16960) = 2.5 years

Project BB:

Payback period = $23320 / $10600 / year = 2.20 years

Project CC"

Payback period = 1 + (23320 - 13780 ) / (26500 - 13780) = 1.75

The most desirable project, Project CC

The least desirable project is project project AA

b)

Most desirable roject is CC

least desirable project is AA

Year Project AA ($) Project BB ($) Project CC ($) Cash flow Cumulative cash flow Cash flow Cumulative cash flow Cash flow Cumulative cash flow 1 7420 7420 10600 10600 13780 13780 2 9540 16960 10600 21200 12720 26500 3 12720 29680 10600 31800 11660 38160

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.