Project Brown Red Yellow (a) Annual rate of return Open Show Work SHOW SOLUTION
ID: 2455456 • Letter: P
Question
Project
Brown
Red
Yellow
(a)
Annual rate of return
Open Show Work
SHOW SOLUTION
Net present value
Open Show Work
Sanchez Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows.Project
Brown
Red
Yellow
Capital investment $191,720 $220,540 $248,070 Annual net income: Year 1 25,042 20,209 26,264 2 16,271 20,209 24,401 3 13,451 20,209 23,139 4 10,254 20,209 17,058 5 8,471 20,209 20,046 Total $ 73,489 $101,045 $110,908Salvage 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
Solution:
(1). Caluculation of Annual Rate of Return:
(A). Brown:
Rate of Return = 73,489 / 1,91,720 * 100
= 38.33 %
(B). Red :
Rate of Return = 101,045 / 220,540 * 100
= 45.81 %
(C). Yellow:
Rate of Return = 110,908 / 248,070 * 100
= 44.70 %
(2). Caluculation of Net Present Value:
(A). Brown:
Net Present Value =
R1 = the net cash inflow during the first period
R2 = the net cash inflow during the second period
R3 = the net cash inflow during the third period, and so on ......
( OR ) Other Way
= Total Cashinflows - Total Initial Investment = Present Value of Amount
= $73,489 + $1,01,045 + $1,10,908 - $1,91,720 + $ 2,20,540 + $ 2,48,070
= 2,85,442 - 6,60,330
= 3,74,888
Rate of Return = Annual Net Income / Initial Investment * 100Related Questions
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