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