Problem - Calculate cash payback and net present value.
Jack's Custom Manufacturing Company is considering three new projects. Each one requires an equipment investment of $21,000, will last for three years, and will produce the following net annual cash flows:
Year AA BB CC
1 $ 7,000 $ 9,500 $13,000
2 9,000 9,500 10,000
3 15,000 9,500 11,000
Total $31,000 $28,500 $34,000
The equipment's salvage value is zero, and Jack uses straight-line amortization. Jack will not accept any project with a payback period over two years. Jack's required rate of return is 12%.
Calculate each project's payback period, indicating the most desirable project and the least desirable project using this method.
Calculate the net present value of each project.