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 $24,420. 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%.

(a) Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)
AA __________ years

BB __________ years

CC __________ years

(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.)
AA__________

BB__________

CC__________

Year AA BB CC 1 $7770 $11100 $14430 2 9990 11100 13320 3 13320 11100 12210 Total $31080 $33300 $39960

Explanation / Answer

a Project AA: Year Cash flows Cumulative Cash flows 0 -24420 -24420 1 7770 -16650 2 9990 -6660 3 13320 6660 Payback period=2+(6660/13320)= 2.5 Project BB payback period=24420/11100= 2.2 Project CC: Year Cash flows Cumulative Cash flows 0 -24420 -24420 1 14430 -9990 2 13320 3330 3 12210 15540 Payback period=1+(9990/13320)= 1.75 b Project AA Net present value = (7770*0.89286)+(9990*0.79719)+(13320*0.71178)-24420= -38 Project BB Net present value =(11100*2.40183)-24420= 2240 Project CC Net present value = (14430*0.89286)+(13320*0.79719)+(12210*0.71178)-24420= 7773

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