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Homework answers / question archive / Question 4 Blue's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,440
Question 4 Blue's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,440. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $7,140 $10,200 $13,260 2 9,180 10,200 12,240 3 12,240 10,200 11,220 Total $28,560 $30,600 $36,720 The equipment's salvage value is zero, and Blue uses straight-line depreciation. Blue will not accept any project with a cash payback period over 2 years. Blue's required rate of return is 12%. Click here to view py table (a) Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) ?? years BE years CC years 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) Project 1 Project AA Compute the net present value of each project. (Enter Project CC nts using alther 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) BBS CC Which is the most desirable project based on not 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 Click if you would like to Show Work for this questie Project AA w Work Project CC Project BB
(a) PROJECT'S PAYBACK PERIOD
PROJECT AA
| Year | Annual Cash flow | Accumulated Cash flow |
| 1 | $7,140 | $7,140 |
| 2 | $9,180 | $16,320 |
| 3 | $12,240 | $28,560 |
Year Cash flow
1 $12,240 ($28,560 - $16,320)
? $6,120 ($22,440 - $16,320)
$6,120 / $12,240 = 0.5 year
Payback Period = 2 years + 0.5 years = 2.50 years
PROJECT BB
| Payback Period = Initial Investment / Annual cash flow |
Payback period = $22,440 / $10,200 = 2.20 Year
PROJECT CC
| Year | Annual Cash flow | Accumulated Cash flow |
| 1 | $13,260 | $13,260 |
| 2 | $12,240 | $25,500 |
| 3 | $11,220 | $36,720 |
Year Cash flow
1 $12,240 ($25,500 - $13,260)
? $9,180 ($22,440 - $13,260)
$9,180 / $12,240 = 0.75 year
Payback Period = 1 years + 0.75 years = 1.75 years
|
Most desirable project based on payback period is Project CC. Least desirable project based on payback period is Project AA. |
(b) NET PRESENT VALUE
PROJECT AA
| Year | Cash Flow | PVF @ 12% | Discounted Cash flow |
| 1 | $7,140 | 0.89286 | $6,375 |
| 2 | $9,180 | 0.79719 | $7,318 |
| 3 | $12,240 | 0.71178 | $8,712 |
| 0 | ($22,440) | 1 | ($22,440) |
| Net Present Value | ($35) |
PROJECT BB
| Year | Cash Flow | PVF @ 12% | Discounted Cash flow |
| 1-3 | $10,200 | 2.40183 | $24,499 |
| 0 | ($22,440) | 1 | ($22,440) |
| Net Present Value | $2,059 |
PROJECT CC
| Year | Cash Flow | PVF @ 12% | Discounted Cash flow |
| 1 | $13,260 | 0.89286 | $11,839 |
| 2 | $12,240 | 0.79719 | $9,758 |
| 3 | $11,220 | 0.71178 | $7,986 |
| 0 | ($22,440) | 1 | ($22,440) |
| Net Present Value | $7,143 |
|
Most desirable project based on net present value is Project CC. Least desirable project based on net present value is Project AA. |
