Question

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.

(a)

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

AA		enter the payback period in years rounded to 2 decimal places	years
BB		enter the payback period in years rounded to 2 decimal places	years
CC		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
BB		enter the net present value in dollars rounded to the nearest whole
CC		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 AAProject CCProject BB .

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 CCProject AAProject BB .

Answer 1

		Project A		Project B		Project C
	Year	Net Annual Cashflows	Cumulative Net Annual Cashflows	Net Annual Cashflows	Cumulative Net Annual Cashflows	Net Annual Cashflows	Cumulative Net Annual Cashflows
	1	$7,140	$7,140	$10,200	$10,200	$13,260	$13,260
	2	$9,180	$16,320	$10,200	$20,400	$12,240	$25,500
	3	$12,240	$28,560	$10,200	$30,600	$11,220	$36,720
		Payback Period =2 Years + ($28,560-22,440)/$12,240		Payback Period =2 Years + ($30,600-22,440)/$10,200		Payback Period =1 Years + ($25,500-22,440)/$12,240
		Payback Period =2 Years + 0.50 =2.50 years		Payback Period =2 Years + 0.80 =2.80 years		Payback Period =2 Years + 0.25 =2.25 years
		Since the Payback period of Project C is least hence the same is most desirable
		Similarly Project b is least desirable
		Project A			Project B			Project C
	Year	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows
	1	$7,140	0.89286	$6,375	$10,200	0.89286	$9,107	$13,260	0.89286	$11,839
	2	$9,180	0.79719	$7,318	$10,200	0.79719	$8,131	$12,240	0.79719	$9,758
	3	$12,240	0.71178	$8,712	$10,200	0.71178	$7,260	$11,220	0.71178	$7,986
Total PV of Net Cash Flows				$22,405			$24,499			$29,583
Less:Initial Investment				$22,440			$22,440			$22,440
NPV				-$35			$2,059			$7,143
		As per NPV Project C is most desirable and Project A is least