Doug\'s Custom Construction Company is considering three new projects, each requ
ID: 2532422 • Letter: D
Question
Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $23,540. Each project wl last for 3 years and produce the following net annual cash flows. YearAA 1$7,490 $10,700 $13,910 9,630 10,700 12,840 3 12,840 10,700 11,770 Total $29,960 $32,100 $38,520 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 Py table. Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) 2.5 years 2.2 years 1.75 years Which is the most desirable project? The most desirable project based on payback period ise Project CC vExplanation / Answer
Solution:-
(a) Project payback period:-
Initial investment = 23540
AA:- 23540 – 7490 (1st yr) – 9630 (2nd yr) = 6420
6420/12840 (3rd yr) = 0.5
Payback period is = 2.5 yrs
BB:- 23540/10700
Payback period =2.2 yrs
CC:- 23540 – 13910 (1st yr) = 9630
9630/12840 (2nd yr) = 0.75
Payback period = 1.75 yrs
(b) Net Present Value:-
Particulars
Project AA
Project BB
Project CC
(A) Initial Investment
23540
23540
23540
(B) PV of cash inflow (Annual cash flow * PVIF @ 12% )
(7490*0.89286)
(9630*0.79719)
(12840*0.71178)
= 23503.72
(10700*2.40183)
= 25699.58
(13910*0.89286)
(12840*0.79719)
(11770*0.71178)
= 31033.25
Net Present Value
(36.28)
2159.58
7493.25
Least Desirable
-----------------------
Most Desirable
Particulars
Project AA
Project BB
Project CC
(A) Initial Investment
23540
23540
23540
(B) PV of cash inflow (Annual cash flow * PVIF @ 12% )
(7490*0.89286)
(9630*0.79719)
(12840*0.71178)
= 23503.72
(10700*2.40183)
= 25699.58
(13910*0.89286)
(12840*0.79719)
(11770*0.71178)
= 31033.25
Net Present Value
(36.28)
2159.58
7493.25
Least Desirable
-----------------------
Most Desirable
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