Question

artinez’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $23,980. Each project will last for 3 years and produce the following net annual cash flows.

Year		AA		BB		CC
1		$7,630		$10,900		$14,170
2		9,810		10,900		13,080
3		13,080		10,900		11,990
Total		$30,520		$32,700		$39,240

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

(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 BBProject AA .

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

The least desirable project based on net present value is

Project CCProject BBProject AA

.

Answer 1