Jack's Custom Manufacturing Company is considering three new projects. Each one requires an equipment in- vestment of $25,000, will last for three years, and will produce the following net annual cash flows:

The equipment's salvage value is zero, and Jack uses straight-line depreciation. Jack will not accept any project with a pay- back period longer than two and a half years. Jack's required rate of return is 12%.
Instructions
(a) Calculate each project's payback period, indicating the most desirable project and the least desirable project using this method.
(b) Calculate the net present value of each project. Does your evaluation change?

Transcribed Image Text:

Year $ 7,000 9,000 12,000 $28,000 $ 9,600 9,600 9,600 S28,800 $13,000 9,000 11,000 $33,000 Total