Question

Exercise 25-02

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $24,200. Each project will last for 3 years and produce the following net annual cash flows.

Year		AA		BB		CC
1		$7,700		$11,000		$14,300
2		9,900		11,000		13,200
3		13,200		11,000		12,100
Total		$30,800		$33,000		$39,600

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 the factor table.

(a)

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

AA		Enter a number of years rounded to 2 decimal places	years
BB		Enter a number of years rounded to 2 decimal places	years
CC		Enter a number of years rounded to 2 decimal places	years

Which is the most desirable project?

The most desirable project based on payback period is

select a project Project AAProject BBProject CC

Which is the least desirable project?

The least desirable project based on payback period is

select a project 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		enter a dollar amount rounded to 0 decimal places
BB		enter a dollar amount rounded to 0 decimal places
CC		enter a dollar amount rounded to 0 decimal places

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

The most desirable project based on net present value is select a project Project CCProject AAProject BB .

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

The least desirable project based on net present value is select a project Project CCProject AAProject BB .

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Answer 1

Project BB Most desrable as per Payaback period

Project CC least desirable as per Payaback

Project CC most deirable as per NPV

Project AA least desirable as per NPV