Doug?s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each
Question:
Doug?s Custom Construction 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 net annual cash flows.
Year | AA | BB | CC | ||||
1 | $7,000 | $10,000 | $13,000 | ||||
2 | 9,000 | 10,000 | 12,000 | ||||
3 | 12,000 | 10,000 | 11,000 | ||||
Total | $28,000 | $30,000 | $36,000 |
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 |
| years | |
BB |
| years | |
CC |
| years |
Which is the most desirable project?
The most desirable project based on payback period is | Project AAProject BBProject CC |
Which is the least desirable project?
The least desirable project based on payback period is | 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 |
| ||
BB |
| ||
CC |
|
Which is the most desirable project based on net present value?
The most desirable project based on net present value is Project BBProject AAProject CC. |
Which is the least desirable project based on net present value?
The least desirable project based on net present value is Project AAProject CCProject BB. |
Accounting Principles
ISBN: 978-1119419617
IFRS global edition
Authors: Paul D Kimmel, Donald E Kieso Jerry J Weygandt