PLEASE COMPLETE FULL PROBLEM** THANK YOU Henkel Company is considering three lon

Question

PLEASE COMPLETE FULL PROBLEM**

THANK YOU

Henkel 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 Kilo

Project Lima

Project Oscar

14,000

9,000

12,000

$ 70,000

$72,000

$96,000

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.)

Instructions

Compute the cash payback period for each project. (Round to two decimals.)

Compute the net present value for each project. (Round to nearest dollar.)

Compute the annual rate of return for each project. (Round to two decimals.)

(Hint: Use average annual net income in your computation.)

Rank the projects on each of the foregoing bases. Which project do you recommend?

Project Kilo

Project Lima

Project Oscar

Capital investment $150,000 $165,000 $200,000 Annual net income: Year 1 14,000 18,000 27,000 2 14,000 17,000 23,000 3 14,000 16,000 21,000 4 14,000 12,000 13,000 5

14,000

9,000

12,000

Total

$ 70,000

$72,000

$96,000

Explanation / Answer

Payback Period = Investment required for projcet / Net annual Cash Inflow (In case of Even Cash Inflow) Payback Period = A + (B/C) Where, A is the last period with a negative cumulative cash flow B is the absolute value of cumulative cash flow at the end of the period A C is the total cash flow during the period after A Project Kilo Capital Investment $150,000 Annual Net Income: Dep. Per Year Total Cash Inflow Year 1 $14,000 30000 $44,000 Year 2 $14,000 30000 $44,000 Year 3 $14,000 30000 $44,000 Year 4 $14,000 30000 $44,000 Year 5 $14,000 30000 $44,000 Total $70,000 $150,000 $220,000 Payback Period of Project Kilo= $150000 / $44000 = 3.41 Years Project Lima Capital Investment $165,000 Annual Net Income: Dep. Per Year Total Cash Inflow Cum. Cash Inflow Year 0 ($165,000) 0 ($165,000) ($165,000) Year 1 $18,000 33000 $51,000 ($114,000) Year 2 $17,000 33000 $50,000 ($64,000) Year 3 $16,000 33000 $49,000 ($15,000) Year 4 $12,000 33000 $45,000 $30,000 Year 5 $9,000 33000 $42,000 $72,000 Total $165,000 $237,000 Payback Period of Project Lima= 3 Years + ($15000 / $45000) Payback Period of Project Lima= 3.33 Years Project Oscar Capital Investment $200,000 Annual Net Income: Dep. Per Year Total Cash Inflow Cum. Cash Inflow Year 0 ($200,000) 0 ($200,000) ($200,000) Year 1 $27,000 40000 $67,000 ($133,000) Year 2 $23,000 40000 $63,000 ($70,000) Year 3 $21,000 40000 $61,000 ($9,000) Year 4 $13,000 40000 $53,000 $44,000 Year 5 $12,000 40000 $52,000 $96,000 Total $200,000 $296,000 Payback Period of Project Oscar= 3 Years + ($9000 / $53000) Payback Period of Project Oscar= 3.17 Years Answer B Calculation of Net Present Value Project Kilo Project Lima Project Oscar PV Factor @15% (A) Cash Inflow (B) FV (A X B) Cash Inflow (c) FV (A X C) Cash Inflow (D) FV (A X D) Year 0 1 ($150,000) ($150,000) ($165,000) ($165,000) ($200,000) ($200,000) Year 1 0.8696 $44,000 $38,262 $51,000 $44,350 $67,000 $58,263 Year 2 0.7561 $44,000 $33,268 $50,000 $37,805 $63,000 $47,634 Year 3 0.6575 $44,000 $28,930 $49,000 $32,218 $61,000 $40,108 Year 4 0.5718 $44,000 $25,159 $45,000 $25,731 $53,000 $30,305 Year 5 0.4972 $44,000 $21,877 $42,000 $20,882 $52,000 $25,854 Net Present Value of Project ($2,503) ($4,015) $2,165 Answer C Project First Cost Annual Benefit Life (years) Factor of IRR IRR A B C A/B E Project Kilo $150,000 $44,000 5 3.4091 14% Project Lima $165,000 $47,400 5 3.4810 13% Project Oscar $200,000 $59,200 5 3.3784 13% Answer D Project Kilo Project Lima Project Oscar Pay Back period 3.41 Years 3.33 years 3.17 years Ranking III II I NPV ($2,503) ($4,015) $2,165 Ranking II III I IRR 14% 13% 13% Ranking III II I

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