Question

# Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of \$26,840....

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of \$26,840. Each project will last for 3 years and produce the following net annual cash flows.

Year AA BB \$8,540 \$12,200 \$15,860 10,980 12,200 14,640 14,640 12,200 13,420 \$34,160 \$36,600 \$43,920

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 BB enter the payback period in years rounded to 2 decimal places years enter the payback period in years rounded to 2 decimal places years 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                                                          Project AAProject BBProject CC

Which is the least desirable project?

 The least desirable project based on payback period is select the least desirable project based on payback period                                                          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 enter the net present value in dollars rounded to the nearest whole enter the net present value in dollars rounded to the nearest whole 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                                                          Project BBProject AAProject CC.

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                                                          Project BBProject AAProject CC.

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 \$8,540.00 \$8,540.00 \$12,200.00 \$12,200.00 \$15,860.00 \$15,860.00 2 \$10,980.00 \$19,520.00 \$12,200.00 \$24,400.00 \$14,640.00 \$30,500.00 3 \$14,640.00 \$34,160.00 \$12,200.00 \$36,600.00 \$13,420.00 \$43,920.00

Payback period:

Project AA = 2 years + (\$26840 - \$19520) / \$14640 = 2.50 years

Project BB = \$26840 / \$12200 = 2.20 years

Project CC =  1 year + (\$26840 - \$15860) / \$14640 = 1.75 years

Most desirable project based on payback period is "Project CC"

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 \$26,840 \$26,840 \$26,840 \$26,840 \$26,840 \$26,840 Present Value of Cash outflows (A) \$26,840 \$26,840 \$26,840 Cash Inflows Year 1 1 0.89286 \$8,540.00 \$7,625 \$12,200.00 \$10,893 \$15,860.00 \$14,161 Year 2 2 0.79719 \$10,980.00 \$8,753 \$12,200.00 \$9,726 \$14,640.00 \$11,671 Year 3 3 0.71178 \$14,640.00 \$10,420 \$12,200.00 \$8,684 \$13,420.00 \$9,552 Present Value of Cash Inflows (B) \$26,799 \$29,302 \$35,384 Net Present Value (NPV) (B-A) -\$41 \$2,462 \$8,544

Most desirable project based on NPV is Project "CC"

Least desirable project based on NPV is Project "AA"