Question

Ducan Company is considering three new projects, each requiring an equipment investment of $25,740. Each project will last for 3 years and produce the following net annual cash flows.

Year		AA		BB		CC
1		$8,190		$11,700		$15,210
2		10,530		11,700		14,040
3		14,040		11,700		12,870
Total		$32,760		$35,100		$42,120

The equipment’s salvage value is zero, and Sheffield uses straight-line depreciation. Sheffield will not accept any project with a cash payback period over 2 years. Sheffield’s required rate of return is 12%.

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(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 CCProject AAProject BB.

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.

Answer 1

		Project AA		Project BB		Project CC
	Year	Net Annual Cashflows	Cumulative Net Annual Cashflows	Net Annual Cashflows	Cumulative Net Annual Cashflows	Net Annual Cashflows	Cumulative Net Annual Cashflows
	1	$8,190	$8,190	$11,700	$11,700	$15,210	$15,210
	2	$10,530	$18,720	$11,700	$23,400	$14,040	$29,250
	3	$10,040	$28,760	$11,700	$35,100	$12,870	$42,120
		Payback Period =2 Years + ($28,760-25,740)/$10,040		Payback Period =2 Years + ($35,100-25,740)/$11,700		Payback Period =1 Years + ($29,250-25,740)/$14,040
		Payback Period =2 Years + 0.30 =2.30 years		Payback Period =2 Years + 0.80 =2.80 years		Payback Period =1 Years + 0.25 =1.25 years
		Since the Payback period of Project CC is least hence the same is most desirable
		Similarly Project BB is least desirable
		Project AA			Project BB			Project CC
	Year	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows
	1	$8,190	0.89286	$7,313	$11,700	0.89286	$10,446	$15,210	0.89286	$13,580
	2	$10,530	0.79719	$8,394	$11,700	0.79719	$9,327	$14,040	0.79719	$11,193
	3	$10,040	0.71178	$7,146	$11,700	0.71178	$8,328	$12,870	0.71178	$9,161
Total PV of Net Cash Flows				$22,853			$28,101			$33,934
Less:Initial Investment				$25,740			$25,740			$25,740
NPV				-$2,887			$2,361			$8,194
		As per NPV Project CC is most desirable and Project AA is least desirable