Henkel Company is considering three long-term capital investment proposals. Each
ID: 2477903 • Letter: H
Question
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.
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.)
A) Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)
B) 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).)
C) 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.)
D) Rank the projects on each of the foregoing bases. Which project do you recommend?
Explanation / Answer
Henkel company Project Evaluation Project Kilo Details Year PV Factor @15% Investment Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0 1 (162,750) (162,750) (162,750) Year 1 0.870 13,650 32,550 46,200 40,174 Year 2 0.756 13,650 32,550 46,200 34,934 Year 3 0.658 13,650 32,550 46,200 30,377 Year 4 0.572 13,650 32,550 46,200 26,415 Year 5 0.497 13,650 32,550 46,200 22,970 Total (7,880.43) Cash Payback period= 3.52 years NPV = $ (7,880.43) Annual Net Income 13,650 Investment 162,750 Annual rate of return=Annual Net Income/Investment 8.39% Project Lima Details Year PV Factor @15% Investment Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0 1 (173,250) (173,250) (173,250) Year 1 0.870 18,375 34,650 53,025 46,109 Year 2 0.756 17,325 34,650 51,975 39,301 Year 3 0.658 16,275 34,650 50,925 33,484 Year 4 0.572 12,075 34,650 46,725 26,715 Year 5 0.497 8,925 34,650 43,575 21,664 Total 72,975 (5,977.08) Cash Payback period= 3.37 years NPV = $ (5,977.08) Annual Avg Net Income 14,595 Investment 173,250 Annual rate of return=Annual Net Income/Investment 8.42% Project Oscar Details Year PV Factor @15% Investment Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0 1 (212,550) (212,550) (212,550) Year 1 0.870 28,875 42,510 71,385 62,074 Year 2 0.756 23,625 42,510 66,135 50,008 Year 3 0.658 22,575 42,510 65,085 42,794 Year 4 0.572 14,175 42,510 56,685 32,410 Year 5 0.497 13,125 42,510 55,635 27,660 Total 102,375 2,396.18 Cash Payback period= 3.18 years NPV = $ 2,396.18 Annual Avg Net Income 20,475 Investment 212,550 Annual rate of return=Annual Net Income/Investment 9.63% Ranking Payback NPV ARR Kilo 3.00 3 3 Lima 2.00 2 2 Oscar 1.00 1 1 Recommended project is Oscar as this project only has positive NPV
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