Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows.
|
Year |
AA |
BB |
CC |
||||
|
1 |
$7,000 |
$10,000 |
$13,000 |
||||
|
2 |
9,000 |
10,000 |
12,000 |
||||
|
3 |
12,000 |
10,000 |
11,000 |
||||
|
Total |
$28,000 |
$30,000 |
$36,000 |
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.)
|
AA |
|
years |
|
|
BB |
|
years |
|
|
CC |
|
years |
Which is the most desirable project?
|
The most desirable project based on payback period is |
Project AAProject BBProject CC |
Which is the least desirable project?
|
The least desirable project based on payback period is |
Project BBProject AAProject CC |
(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 |
|
Which is the most desirable project based on net present value?
|
The most desirable project based on net present value is Project BBProject AAProject CC. |
Which is the least desirable project based on net present value?
|
The least desirable project based on net present value is Project AAProject CCProject BB. |
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