Exercise 26-9

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.

YearAABBCC1$7,980$11,400$14,820210,26011,40013,680313,68011,40012,540Total$31,920$34,200$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.

Click here to view PV of Annuity table.

(a)

Compute each project?s payback period. (Round answers to 2 decimal places, e.g. 15.25.)

AA

yearsBB

yearsCC

years

Which is the most desirable project?

The most desirable project based on payback period isProject AAProject BBProject CC

Which is the least desirable project?

The least desirable project based on payback period isProject 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

BB

CC

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

The most desirable project based on net present value isProject AAProject BBProject CC

.

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

The least desirable project based on net present value isProject CCProject AAProject BB

.

Exercise 26-9 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 AA $7,980 10,260 13,680 BB $11,400 11,400 11,400 CC $14,820 13,680 12,540 Total $31,920 $34,200 $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. Click here to view PV of Annuity table. (a) Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) AA year s BB year s CC year s 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.) AA BB CC 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 . Table3Present Value of 1 (n) Periods 4% 5% 1 .96154 .95238 2 .92456 .90703 3 .88900 .86384 4 .85480 .82270 5 .82193 .78353 6 .79031 .74622 7 .75992 .71068 8 .73069 .67684 6% 7% . .93458 94340 . .87344 89000 . .81630 83962 . .76290 79209 . .71299 74726 . .66634 70496 . .62275 66506 . .58201 62741 8% 9% 10% 11% 12% . .89286 .86957 90090 . .82645 .79719 .75614 81162 . .75132 .71178 .65752 73119 . .68301 .63552 .57175 65873 . .62092 .56743 .49718 59345 . .56447 .50663 .43233 53464 . .51316 .45235 .37594 48166 . .46651 .40388 .32690 43393 .92593 .91743 .90909 .85734 .84168 .79383 .77218 .73503 .70843 .68058 .64993 .63017 .59627 .58349 .54703 .54027 .50187 15% Table3Present Value of 1 (n) Periods 4% 5% 1 .96154 .95238 2 .92456 .90703 9 .70259 .64461 10 .67556 .61391 11 .64958 .58468 12 .62460 .55684 13 .60057 .53032 14 .57748 .50507 15 .55526 .48102 16 .53391 .45811 17 .51337 .43630 18 .49363 .41552 19 .47464 .39573 20 .45639 .37689 6% 7% . .93458 94340 . .87344 89000 . .54393 59190 . .50835 55839 . .47509 52679 . .44401 49697 . .41496 46884 . .38782 44230 . .36245 41727 . .33873 39365 . .31657 37136 . .29586 35034 . .27615 33051 . .25842 31180 8% 9% 10% 11% 12% . .89286 .86957 90090 . .82645 .79719 .75614 81162 . .42410 .36061 .28426 39092 . .38554 .32197 .24719 35218 . .35049 .28748 .21494 31728 . .31863 .25668 .18691 28584 . .28966 .22917 .16253 25751 . .26333 .20462 .14133 23199 . .23939 .18270 .12289 20900 . .21763 .16312 .10687 18829 . .19785 .14564 .09293 16963 . .17986 .13004 .08081 15282 . .16351 .11611 .07027 13768 . .14864 .10367 .06110 12403 .92593 .91743 .90909 .85734 .84168 .50025 .46043 .46319 .42241 .42888 .38753 .39711 .35554 .36770 .32618 .34046 .29925 .31524 .27454 .29189 .25187 .27027 .23107 .25025 .21199 .23171 .19449 .21455 .17843 + 15% Table3Present Value of 1 (n) Periods 4% 1 .96154 2 .92456 5% 6% 7% 8% 9% 10% 11% 12% 15% . . .93458 .92593 .91743 .90909 .89286 .86957 94340 90090 . . .90703 .87344 .85734 .84168 .82645 .79719 .75614 89000 81162 .95238 Table4Present Value of an Annuity of 1 (n) Payment 4% 5% 6% s 1 .96154 .95238 .94340 2 1.88609 1.85941 1.83339 3 2.77509 2.72325 2.67301 4 3.62990 3.54595 3.46511 5 4.45182 4.32948 4.21236 6 5.24214 5.07569 4.91732 7 6.00205 5.78637 5.58238 8 6.73274 6.46321 6.20979 9 7.43533 7.10782 6.80169 10 8.11090 7.72173 7.36009 11 8.76048 8.30641 7.88687 12 9.38507 8.86325 8.38384 13 9.98565 9.39357 8.85268 14 10.5631 9.89864 9.29498 7% 8% .93458 .92593 1.7832 1.80802 6 2.5771 2.62432 0 3.3121 3.38721 3 3.9927 4.10020 1 4.6228 4.76654 8 5.2063 5.38929 7 5.7466 5.97130 4 6.2468 6.51523 9 6.7100 7.02358 8 7.1389 7.49867 6 7.5360 7.94269 8 7.9037 8.35765 8 8.74547 8.2442 9% .91743 1.7591 1 2.5313 0 3.2397 2 3.8896 5 4.4859 2 5.0329 5 5.5348 2 5.9952 5 6.4176 6 6.8051 9 7.1607 3 7.4869 0 7.7861 10 % .90909 1.73554 2.48685 3.16986 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457 6.49506 6.81369 7.10336 7.36669 11% 12% .90090 1.7125 2 2.4437 1 3.1024 5 3.6959 0 4.2305 4 4.7122 0 5.1461 2 5.5370 5 5.8892 3 6.2065 2 6.4923 6 6.7498 7 6.9818 .89286 1.6900 5 2.4018 3 3.0373 5 3.6047 8 4.1114 1 4.5637 6 4.9676 4 5.3282 5 5.6502 2 5.9377 0 6.1943 7 6.4235 5 6.6281 Table3Present Value of 1 (n) Periods 4% 1 .96154 2 .92456 15 16 17 18 19 20 2 11.1183 9 11.6523 0 12.1656 7 12.6593 0 13.1339 4 13.5903 3 5% 6% 7% 8% 9% 10% 11% 12% 15% . . .93458 .92593 .91743 .90909 .89286 .86957 94340 90090 . . .90703 .87344 .85734 .84168 .82645 .79719 .75614 89000 81162 4 5 7 7 10.3796 8.5594 8.0606 7.1908 6.8108 9.71225 9.10791 7.60608 6 8 9 7 6 10.8377 8.8513 8.3125 7.3791 6.9739 10.10590 9.44665 7.82371 7 7 6 6 9 11.2740 9.1216 8.5436 7.5487 7.1196 10.47726 9.76322 8.02155 7 4 3 9 3 11.6895 10.0590 9.3718 8.7556 7.7016 7.2496 10.82760 8.20141 9 9 9 3 2 7 12.0853 10.3356 9.6036 8.9501 7.8392 7.3657 11.15812 8.36492 2 0 0 2 9 8 12.4622 10.5940 9.8181 9.1285 7.9633 7.4694 11.46992 8.51356 1 1 5 5 3 4 .95238