Ivanhoe’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,880. Each project will last for 3 years and produce the following net annual cash flows.

Year		AA		BB		CC
1		$7,280		$10,400		$13,520
2		9,360		10,400		12,480
3		12,480		10,400		11,440
Total		$29,120		$31,200		$37,440

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

(a) Compute each project’s payback period. 

AA		enter the number of years rounded to 2 decimal places	years
BB		enter the number of years rounded to 2 decimal places	years
CC		enter the number of years rounded to 2 decimal places	years

Which is the most desirable project?

The most desirable project based on payback period is

select a project Project AAProject BBProject CC

Which is the least desirable project?

The least desirable project based on payback period is

select a project Project BBProject AAProject CC

(b) Compute the net present value of each project.

AA		enter a dollar amount rounded to 0 decimal places
BB		enter a dollar amount rounded to 0 decimal places
CC		enter a dollar amount rounded to 0 decimal places

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

The most desirable project based on net present value is select a project Project BBProject CCProject AA.

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

The least desirable project based on net present value is select a project Project AAProject CCProject BB.

Answer rating: 100% (QA)

ANSWER Year 0 Year Cash Flows 0 AA 1 2 3 Pay Back Period CCF 22880 ... View the full answer