Question

Hurricane Manufacturing Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following cash inflows. Year АА $ 7,000 9,000 15,000 $31,000 BB $ 9,500 9,500 9,500 $28,500 CC $11,000 10,000 9,000 $30,000 Total The equipment's salvage value is zero. Hurricane uses straight-line depreciation. Hurricane will not accept any project with a payback period over 2 years. Hurricane's minimum required rate of return is 12%. Instructions (a) Compute each project's payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals.) (b) Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.)

Answer 1

a)	Payback Period
payback period means bumber of years in which investment will be recovered
Project AA
	=2 years + 1/15000 *(22000-7000-9000)
	=2.4 years
Project BB		=$22000/9500
		=2.32 years
Project CC
	=2 Years + 1/9000*(22000-11000-10000)
	=2.111 years
Most Desirable Project = Project CC
Least Desirable Project = Project AA
Note :
It is given in the question that Hurricane will not accept project if payback period is more than
2 years hence no project will be accepted by Hurricane. If he has to accept any project mandatorilly
he will accept project CC since it has least payback period.
b)	Net Present Value
	Year	Discount Factor @12%	Project AA		Project BB		Project CC
			Cash Flow	Discounted Cash Flow	Cash Flow	Discounted Cash Flow	Cash Flow	Discounted Cash Flow
	a	b	c	d=c*b	c	d=c*b	c	d=c*b
	0	1	-22000	-22000	-22000	-22000	-22000	-22000
	1	0.893	7000	6250	9500.00	8482.14	11000	9821.43
	2	0.797	9000	7174.74	9500.00	7573.34	10000	7971.94
	3	0.712	15000	10676.70	9500.00	6761.91	9000	6406.02
		NPV		2101.45		817.40		2199.39
	Since NPV of project CC is more than others he should accept project CC