Chris's Custom Manufacturing Company is considering three new projects, each requiring an equipment investment of $21,000. Each

Question:

Chris's Custom Manufacturing Company is considering three new projects, each requiring an equipment investment of $21,000. Each project will last for 3 years and produce the following net annual cash flows.

The equipment's salvage value is zero, and Chris uses straight-line depreciation. Chris will not accept any project with a cash payback period over 2 years. Chris's 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.
(b) Compute the net present value of each project. Does your evaluation change?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...