Problem 23-4A Project Brown Red Yellow (a) Annual rate of return Open Show Work
ID: 2455370 • Letter: P
Question
Problem 23-4A
Project
Brown
Red
Yellow
(a)
Annual rate of return
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(b)
Cash Payback
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(c)
Net present value
Problem 23-4A
Sanchez Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows.Project
Brown
Red
Yellow
Capital investment $189,010 $218,420 $248,620 Annual net income: Year 1 25,311 20,105 26,124 2 16,280 20,105 24,491 3 13,301 20,105 23,013 4 10,397 20,105 17,434 5 8,046 20,105 20,039 Total $ 73,335 $100,525 $111,101Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company’s minimum rate of return is the company’s cost of capital which is 12%.
Explanation / Answer
(a) Annual rate of return = Average profit after tax/Initial capital Invested
Brown = $14667/189010 = 7.76%
Red = $20105/218420 = 9.20%
Yellow = $22220.20/$248620 = 8.94%
Working notes:
Computation of Average PAT
For brown
Average Profit After Tax = $73335/5 = $14667
For Red
Average Profit After Tax = $20105
For yellow = $111101/5 = $22220.20
(b) Calculation of cash Payback period for brown
Cash payback period = 3 +(189010-168298)/48199
= 3.43 years
For Red
Net income befor depreciation per year = 20105+463684 = 63789
Cash payback period = 218420/63789 = 3.42 years
For yellow
Cash back period = 3 + (248620-222800)/67158
= 3.38 years
(c) Calculation of NPV
For brown
For Red = 3.604*63789 - 218420
= 11476
For yellow
Year Net Income before depreciation Cummulative net income 1 63113 63113 2 54082 117195 3 51103 168298 4 48199 216497 5 45848 262345Related Questions
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