roblem 12-1A U3 Company is considering three long-term capital investment propos

Question

roblem 12-1A 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 $171,200 $187,250 $208,000 Annual net income: Year 1 14,980 19,260 28,890 2 14,980 18,190 24,610 3 14,980 17,120 22,470 4 14,980 12,840 13,910 5 14,980 9,630 12,840 Total $74,900 $77,040 $102,720 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.)

Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Compute the net present value for each project. (Round answers to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Compute the annual rate of return for each project. (Hint: Use average annual net income in your computation.) (Round answers to 2 decimal places, e.g. 10.50.)

Explanation / Answer

Project Bono project edge project clayton cash outflow 171200 cash outflow 187250 cash outflow 208000 Year net income dep before dep income present value @15% present value of cash flow cumulative values for Pay back period net income dep before dep income present value @15% present value of cash flow cumulative cash flow net income dep before dep income present value @15% present value of cash flow cumulative values for Pay back period 1 14980 34240 49220 0.869565 42799.9991 49220 19,260 37,450 56,710 0.86956522 49313.04348 56,710 28,890 41,600 70,490 0.86956522 61295.6522 70,490 2 14980 34240 49220 0.756144 37217.3929 98440 18190 37450 55,640 0.75614367 42071.83365 112,350 24610 41600 66,210 0.75614367 50064.2722 136,700 3 14980 34240 49220 0.657516 32362.9474 147660 17120 37450 54,570 0.65751623 35880.6608 166,920 22470 41600 64,070 0.65751623 42127.065 200,770 4 14980 34240 49220 0.571753 28141.6925 23540 amount to be recovered in year 4 12840 37450 50,290 0.57175325 28753.47072 20,330 amount to be recovered in year 4 13910 41600 55,510 0.57175325 31738.0227 7,230 amount to be recovered in year 4 5 14980 34240 49220 0.497177 24471.0372 9630 37450 47,080 0.49717674 23407.0807 12840 41600 54,440 0.49717674 27066.3015 sum of present value of cash flow 164993.069 sum of present value of cash flow 179426.0893 sum of present value of cash flow 212291.314 cash outflow 171200 cash outflow 187250 cash outflow 208000 NPV -6206.9309 NPV -7823.91065 NPV 4291.31353 Pay back period 3.47826087 Years Pay back period 3.404255319 Years Pay back period 3.1302468 Years Accounting rate of return average profit/ initial investment *100 8.75 percent Accounting rate of return average profit/ initial investment *100 8.228571429 percent Accounting rate of return average profit/ initial investment *100 9.87692308 percent average profit 14,980 average profit 15,408 average profit 20,544 investment 171200 investment 187250 investment 208000 Project Clayton should be selected as it is having positive NPV highest rate of return and low pay back period

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