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Question - Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $24,640. Each project will last for 3 years and produce the following net annual cash flows.
Year
AA
BB
CC
1
$7,840
$11,200
$14,560
2
10,080
11,200
13,440
3
12,320
Total
$31,360
$33,600
$40,320
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%.
(a) Compute each project's payback period.
Which is the most desirable project?
Which is the least desirable project?
(b) Compute the net present value of each project.
Which is the most desirable project based on net present value?
Which is the least desirable project based on net present value?
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