U3 Company is considering three long-term capital investment proposals. Each inv

Question

U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows. Project Bono Project Edge Project Clayton Capital investment $168,000 $183,750 $202,000 Annual net income: Year 1 14,700 18,900 28,350 2 14,700 17,850 24,150 3 14,700 16,800 22,050 4 14,700 12,600 13,650 5 14,700 9,450 12,600 Total $73,500 $75,600 $100,800 Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.) Click here to view PV table. Collapse question part (a) Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Bono years Project Edge years Project Clayton years

Explanation / Answer

(a) Compute the cash payback period for each project.

Cash payback period

Project Bono = 3 years+23100/48300 = 3.48 years

Project edge = 3 years+19950/49350 = 3.40 years

Project clayton = 3 years+6250/54050 = 3.12 years

Years Project Bono Project edge Project Clayton Cash flow Cumulative cash flow Cash flow Cumulative cash flow Cash flow Cumulative cash flow 1 48300 48300 55650 55650 68750 68750 2 48300 96600 54600 110250 64550 133300 3 48300 144900 53550 163800 62450 195750 4 48300 193200 49350 213150 54050 249800 5 48300 241500 46200 259350 53000 302800

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