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E12-2 Doug’s Custom Construction Company

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E12-2 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 flows occur evenly throughout the year.)
(b) Compute the net present value of each project. Does your evaluation change? (Round
to nearest dollar.)

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