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%.

Instructions

(a) Compute each project’s payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals and assume in your computations that cash fl ows occur evenly throughout the year.)

(b) Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.)

AppendixLO1