Henkel Company is considering three long-term capital investment proposals. Each

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.
Project Kilo Project Lima Project Oscar Capital investment $161,200 $171,600 $198,900 Annual net income:     Year 1 13,520 18,200 28,600 2 13,520 17,160 23,400 3 13,520 16,120 22,360 4 13,520 11,960 14,040 5 13,520 8,840 13,000 Total $67,600 $72,280 $101,400

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.)



(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)   

Explanation / Answer

Answer:

(a) Project Kilo Net income $13,520 Investment $1,61,200 Depreciation 32,240 Annual net cash flows 45,760 Annual net cash flows $45,760 Payback period 3.52 Project Lima Net Annual Cumulative Year Cash Flow Net Cash Flow 1 $52,520 ($1,19,080) 2 $51,480 -67,600 3 $50,440 -17,160 4 $46,280 29,120 5 $43,160 72,280 Payback 3.37 years Project Oscar Net Annual Cumulative Year Cash Flow Net Cash Flow 1 $68,380 ($1,30,520) 2 $63,180 -67,340 3 $62,140 -5,200 4 $53,820 48,620 5 $52,780 1,01,400 Payback 3.10 years (b) Project Kilo Present Item Amount Years PV Factor Value Net annual cash flows $45,760 1-5 3.35216 $1,53,395 Capital investment 1,61,200 Negative net present value ($7,805) Project Lima Project Oscar Discount Cash Present Cash Present Year Factor Flow Value Flow Value 1 0.86957 $52,520 $45,670 $68,380 $59,461 2 0.75614 $51,480 $38,926 $63,180 $47,773 3 0.65752 $50,440 $33,165 $62,140 $40,858 4 0.57175 $46,280 $26,461 $53,820 $30,772 5 0.49718 $43,160 $21,458 $52,780 $26,241 Total $2,43,880 $1,65,680 $3,00,300 $2,05,105 Capital Investment -1,71,600 -1,98,900 Net present value ($5,920) $6,205 (c) Project Kilo Project Lima Project Oscar Total net income $67,600 $72,280 $1,01,400 Useful life 5 years 5 years 5 years Average annual net income $13,520 $14,456 $20,280 Original Investment $1,61,200 $1,71,600 $1,98,900 Value at end of useful life 0 0 0 Average investment $80,600 $85,800 $99,450 Average annual net income $13,520 $14,456 $20,280 Average investment $80,600 $85,800 $99,450 Annual rate of return 16.77% 16.85% 20.39% Net Annual (d) Project Cash Payback Present Value Rate of Return Kilo 3.52 -7,805 16.77% Lima 3.37 -5,920 16.85% Oscar 3.10 6,205 20.39%

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