Exercise
Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $24,200. Each project will last for 3 years and produce the following net annual cash flows.
|
Year
|
AA
|
BB
|
CC
|
|
1
|
$7,700
|
$11,000
|
$14,300
|
|
2
|
9,900
|
11,000
|
13,200
|
|
3
|
13,200
|
11,000
|
12,100
|
|
Total
|
$30,800
|
$33,000
|
$39,600
|
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?
The most desirable project based on payback period is
(b) Compute the net present value of each project.
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