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.

Problem 24-1A (part level submission) 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 $168,950 Project Lima $179,850 Project Oscar $210,600 Capital investment Annual net income: Year 1 2 3 4 14,170 14,170 14,170 14,170 14,170 $70,850 19,075 17,985 16,895 12,535 9,265 $75,755 29,975 24,525 23,435 14,715 13,625 $106,275 Total 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.) k her iew the fa (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Your answer is correct. Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Kilo Project Lima Project Oscar 3.52 vears 3.37 lyears 3.11 vears

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       (168,950) (168,950)    (168,950) Year 1                   0.870              14,170        33,790        47,960        41,704 Year 2                   0.756              14,170        33,790        47,960        36,265 Year 3                   0.658              14,170        33,790        47,960        31,534 Year 4                   0.572              14,170        33,790        47,960        27,421 Year 5                   0.497              14,170        33,790        47,960        23,845 Total (8,180.64) Cash Payback period=                     3.52 years NPV = $      (8,180.64) Project Lima Details Year   PV Factor @15% Investment   Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0                           1       (179,850) (179,850)    (179,850) Year 1                   0.870              19,075        35,970        55,045        47,865 Year 2                   0.756              17,985        35,970        53,955        40,798 Year 3                   0.658              16,895        35,970        52,865        34,760 Year 4                   0.572              12,535        35,970        48,505        27,733 Year 5                   0.497                 9,265        35,970        45,235        22,490 Total              75,755 (6,204.77) Cash Payback period=                     3.37 years NPV = $      (6,204.77) Project Oscar Details Year   PV Factor @15% Investment   Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0                           1       (210,600) (210,600)    (210,600) Year 1                   0.870              29,975        42,120        72,095        62,691 Year 2                   0.756              24,525        42,120        66,645        50,393 Year 3                   0.658              23,435        42,120        65,555        43,103 Year 4                   0.572              14,715        42,120        56,835        32,496 Year 5                   0.497              13,625        42,120        55,745        27,715 Total            106,275     5,798.69 Cash Payback period=                     3.11 years NPV = $         5,798.69 Details Payback NPV Rank Kilo                     3.52 $ (8,180.64)                         3 Lima                     3.37 $ (6,204.77)                         2 Oscar                     3.11 $    5,798.69                         1 Recommended project is Oscar as this project only has positive NPV

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