Exercise 242 Dougs Custom Construction Company is considerin

Exercise 24-2

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $25,080. Each project will last for 3 years and produce the following net annual cash flows.

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

Solution

Pay back period

Explained

AA = year 1 + 2 = $7,980 + $10,260

= intial investment- 1 and 2 ndrd year Cash flows

= $25,080-$18,240

= $6,840   

Year 3

So pay back for 3 rd year is $6,840/$13,680 = 0.50  

pay back period is 2+0.5 = 2.5

BB = year 1 + 2 = $11,400 + $11,400 = $22,800

= intial investment- 1 and 2 ndrd year Cash flows

= $25,080-$22,800

= $2280

Year 3

So pay back for 3 rd year is $2,280/$11,400 = 0.20  

pay back period is 2+0.2 =2.2

CC = $14,820 for year 1

    = intial investment- 1 year Cash flow

= $25,080- $14,820

= $10,260

so pay back period for CC is 1+ ($10,260/$13,680)

= 1+0.75

= 1.75

The Most Desiable product = CC (lowest pay back period)

The Least Desiable product = AA ( heightest pay bac period)

b. NPV of each project ( assumed it was 10%)