# Doug’s Custom Construction Company is considering three

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.

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