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 $25,520. 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 $8,120 $11,600 $15,080 2 10,440 11,600 13,920 3 13,920 11,600 12,760 Total $32,480 $34,800 $41,760

Explanation / Answer

AA $8,120 + 10,440 = $18,560; $25,520 - 18,560 = $6,960 / 13,920 third year = 0.5 + 2 = 2.5 years
BB $11,600 + 11,600 = $23,200; $25,520 - 23,600 = $2,320 / 11,600 third year =0.2 + 2 = 2.2years
CC $15,080 + 13,920 = $28,000; $25,520 - 29,000 = -3,480 / 12,760 = (0.27) + 2 = 1.73

Which is the most desirable project?

The most desirable project based on payback period is CC.
Because it has the shortest payback period

Which is the least desirable project?

The least desirable project based on payback period is AA
Because it it has the longest payback period

b)

Compute the net present value of each project

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

The most desirable project based on net present value is Project CC. Because it has highest NPV

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

The least desirable project based on net present value is Project AA. Because it has lowest or say negative NPV

$(25,520.00) $(25,520.00) $(25,520.00) Year AA BB CC 1 $8,120 $11,600 $15,080 2 10,440 11,600 13,920 3 13,920 11,600 12,760 12% 12% 12% NPV ($39.31) $2,341.24 $8,123.54

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