Question

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $ 24,640. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $ 7,840 $ 11,200 $ 14,560 2 10,080 11,200 13,440 3 13,440 11,200 12,320 Total $ 31,360 $ 33,600 $ 40,320 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 enter the payback period in years rounded to 2 decimal places years

BB enter the payback period in years rounded to 2 decimal places years

CC enter the payback period in years rounded to 2 decimal places years

Which is the most desirable project?

The most desirable project based on payback period is select the most desirable project based on payback period select the most desirable project based on payback period Which is the least desirable project? The least desirable project based on payback period is select the least desirable project based on payback period select the least desirable project based on payback period

(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 the net present value in dollars rounded to the nearest whole

BB enter the net present value in dollars rounded to the nearest whole

CC enter the net present value in dollars rounded to the nearest whole

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

The most desirable project based on net present value is select the most desirable project based on the net present value select the most desirable project based on the net present value .

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

The least desirable project based on net present value is select the least desirable project based on the net present value select the least desirable project based on the net present value .

Answer 1

Solution a:

Computation of Cumulative Cash flows
Period	AA		BB		CC
	Cash inflows	Cumulative Cash Inflows	Cash inflows	Cumulative Cash Inflows	Cash inflows	Cumulative Cash Inflows
1	$7,840.00	$7,840.00	$11,200.00	$11,200.00	$14,560.00	$14,560.00
2	$10,080.00	$17,920.00	$11,200.00	$22,400.00	$13,440.00	$28,000.00
3	$13,440.00	$31,360.00	$11,200.00	$33,600.00	$12,320.00	$40,320.00

Payback period:

Project AA = 2 years + ($24,640 - $17,920) / $13,440 = 2.50 years

Project BB = $24,640 / 11200 = 2.20 years

Project CC = 1 year + ($24,640 - $14,560) / $13,440 = 1.75 years

The most desirable project based on payback period is = Project CC

The least desirable project based on payback period is = Project AA

Solution b:

Computation of NPV - Doug Custom
			Project AA		Project BB		Project CC
Particulars	Period	PV Factor	Amount	Present Value	Amount	Present Value	Amount	Present Value
Cash outflows:
Cost of Equipment	0	1	$24,640	$24,640	$24,640	$24,640	$24,640	$24,640
Present Value of Cash outflows (A)				$24,640		$24,640		$24,640
Cash Inflows
Year 1	1	0.89286	$7,840.00	$7,000	$11,200.00	$10,000	$14,560.00	$13,000
Year 2	2	0.79719	$10,080.00	$8,036	$11,200.00	$8,929	$13,440.00	$10,714
Year 3	3	0.71178	$13,440.00	$9,566	$11,200.00	$7,972	$12,320.00	$8,769
Present Value of Cash Inflows (B)				$24,602		$26,900		$32,483
Net Present Value (NPV) (B-A)				-$38		$2,260		$7,843

The most desirable project based on NPV is = Project CC

The least desirable project based on NPV is = Project AA