Question

Exercise 26-2 Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $25,080. Each project will last for 3 years and produce the following net annual cash flows. Year 1 2 3 Total AA $7,980 10,260 13,680 $31,920 BB $11,400 11,400 11,400 $34,200 CC $14,820 13,680 12,540 $41,040 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 . 15.25.) years years years Which is the most desirable project? The most desirable project based on payback period is Which is the least desirable project? The least desirable project based on payback period is (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.) Which is the most desirable project based on net present value? The most desirable project based on net present value is Which is the least desirable project based on net present value? The least desirable project based on net present value is

Answer 1

Solution 1 Compuatation of Payback period Cash Inflows Year | AA BB 7980 11400 10260 11400 13680 11400 cc Cumulative Cash Inflows TAA BB C с 14820 7980 11400 14820 13680 18240 22800 28500 1254031920 34200 41040 NM Payback period AA = - 2 years + (25080 - 18240)/25080 = 2 +0.2727 = 2.27 years BB = 2 years +(25080 - 22800)/25080 = 2 + 0.0909 = 2.09 years CC = 1 year + (25080-14820) / 25080 = 1 + 0.409 = 1.41 years Most Desirable project based on payback period is сс DAA Least Desirable project based on payback period is

Project CC Solution 2 Compuation of NPV of each project (rate of return = 12%) Project AA Project BB Present Value PV factor @ Present Value of of Cashflows Year 12% (a) AA (b) Cashflows (axb) BB (c) (axc) 1.000 -25080 $ -25,080.00 -25080 $ -25,080.00 0.893 7980 $ 7,125.00 11400 $ 10,178.57 2 0.797 10260 $ 8,179.21 11400 $ 9,088.01 0.712 13680 $ 9,737.15 11400 $ 8,114.29 NPV (sum of Present val of CFs) $ -38.64 $ 2,300.88 3 w No Present Value of CC (d) Cashflows (axc) -25080 $ -25,080.00 14820 $ 13,232.14 13680 $ 10,905.61 12540 $ 8,925.72 $ 7,983.48 NPV of each Project is: AA $ -38.64 BB $ 2,300.88 CC $ 7,983.48 Most Desirable project based on net present value is DCC Γ ΑΑ Least Desirable project based on net present value is

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