*(a) *(b) *(c) Verdugo Corporation is considering three long-term capital invest
ID: 2373104 • Letter: #
Question
*(a)
*(b)
*(c)
Verdugo Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows.Project Brown Red Yellow Capital investment $188,710 $219,600 $250,720 Annual net income: Year 1 25,500 20,260 26,171 2 16,007 20,260 24,001 3 13,449 20,260 23,444 4 10,160 20,260 17,436 5 8,107 20,260 20,060 Total $ 73,223 $101,300 $111,112
Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company%u2019s required rate of return is the company%u2019s cost of capital which is 12%.
Explanation / Answer
NPV a = - 188710 + (25500 + 188710/5)/1.12 + (16007 + 188710/5)/1.12^2+ (13449 + 88710/5)/1.12^3 + (10160 + 188710/5)/1.12^4 + (8107 +188710/5)/1.12^5
= -10735.87 = -10736
NPV b = - 219600 + (20,260 + 219600/5) / 1.12^1 + (20,260 + 219600/5) / 1.12^2 + (20,260 + 219600/5) / 1.12^3 + (20,260 + 219600/5) / 1.12^4 + (20,260 + 219600/5) / 1.12^5
= 11754.53 = 11755
NPVc = - 250720 + (26172 +250720/5) / 1.12^1 + (24001+250720/5) / 1.12^2 + (23444+250720/5) / 1.12^3 + (17436+250720/5) / 1.12^4 + (20060+250720/5) / 1.12^5
= 11689.65 = 11690
Project
Brown
Red
Yellow Capital investment
$188,710
$219,600
$250,720 Annual net income:
Year 1
25,500
20,260
26,171 2
16,007
20,260
24,001 3
13,449
20,260
23,444 4
10,160
20,260
17,436 5
8,107
20,260
20,060 Total
$ 73,223
$101,300
$111,112
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