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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