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 Entry field with correct answer years
BB Entry field with correct answer years
CC Entry field with correct answer years


Which is the most desirable project?

The most desirable project based on payback period is Entry field with correct answer Project AAProject BBProject CC


Which is the least desirable project?

The least desirable project based on payback period is Entry field with correct answer 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 Entry field with incorrect answer now contains modified data
BB Entry field with incorrect answer now contains modified data
CC Entry field with incorrect answer now contains modified data

Which is the most desirable project based on net present value?

The most desirable project based on net present value is Entry field with correct answer 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 Entry field with correct answer Project AAProject CCProject BB.

Answer 1

Answer:

payback:

A 2.5 less desirable

B 2.2

C 1.75 most desirable

net present value

A -33.89 less desirable

B 2,018

C 7,003 most desirable

Explanation:

payback period: the time of the investment at which recovers the initial investment:

the procedure is as follow:

investment - cash flow per year = carrying value

you repeat this until the cash flow of the next year is equal or higher than the carrying value once that occur you will divide to know at which portion of the year you obtain the payback

A

22,000 - 7,000 - 9,000 = 6,000

6,000 / 12,000 = 0.50

2.5 years

B

22,000 - 10,000 - 10,000 = 2,000

2,000 / 10,000 = 0.2

2.2 years

C

22,000 - 13,000 = 9,000

9,000 / 12,000 = 0.75

1.75 years

net present value: we calculate the discounted value of the cahs inflow:

A

$7,000/1.12 + 9,000/1.12^{2} +12,000 / 1.12^{3}-22,000$

-33.89212828

B

$10,000/1.12 + 10,000/1.12^{2} +10,000 / 1.12^{3}-22,000$

2018.312682

C

$13,000/1.12 + 12,000/1.12^{2} +11,000 / 1.12^{3}-22,000$

7003.052114