Home / Questions / Exercise 26 9 Dougs Custom Construction Company is considering three new projects each re...
Exercise 26-9
Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,440. Each project will last for 3 years and produce the following net annual cash flows.
Year | AA | BB | CC | ||||
1 | $7,140 | $10,200 | $13,260 | ||||
2 | 9,180 | 10,200 | 12,240 | ||||
3 | 12,240 | 10,200 | 11,220 | ||||
Total | $28,560 | $30,600 |
$36,720 |
|
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.
Click here to view PV of Annuity table.
(a)
Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)
AA |
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years | |
BB |
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years | |
CC |
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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 |
|
(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 |
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||
BB |
|
||
CC |
|
Which is the most desirable project based on net present value?
The most desirable project based on net present value is
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Which is the least desirable project based on net present value?
The least desirable project based on net present value is
|
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