Question 1 Dougs Custom Construction Company is considering

Question 1 Doug\'s Custom Construction Company is considering three new projects, each requiring an equipment investment of $27,060. Each project will last for 3 years and produce the following net annual cash flows. Year $8,610 $12,300 $15,990 11,070 12,300 14,760 14.760 12.300 13.530 Total $34,440 S36,900 $44,280 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 Compute each project\'s payback period. (Round answers to 2 decimal places, e.g. 15.25.) ?? years Which is the most desirable project? The most desirable project based on payback period is Which is the least desirable project? The least desirable project based on payback period is 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.) ?? Which is the most desirable project based on net present value The most desirable project based on net present value is Which is the least desirable project based on net present value? The least desirable project based on net present value is

Solution

a) Compute payback period :

AA = 2 Years+7380/14760 = 2.50 Years

BB= 36900/27060 = 1.36 Years

CC = 1 Years+11070/14760 = 1.75 Years

The most desirable project based on payback period is Project BB

The least desirable project based on payback period is Project AA

b) Net present value = Present value of cash inflow-Present value of cash outflow

Project AA = (8610*0.89286+11070*0.79719+14760*0.71178)-27060 = -42

Project BB= (2.40183*12300)-27060 = 2482

Project CC = (15990*.89286+14760*.79719+13530*.71178)-27060 = 8614

The most desirable project based on net present value is Project CC

The least desirable project based on net present value is project AA