Depreciation is computed by the straight-line method with no salvage value. The

Question

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.)

Project Bono Project Edge Project Clayton Capital investment $168,000 $183,750 $202,000 Annual net income: Year  1 14,700 18,900 28,350         2 14,700 17,850 24,150         3 14,700 16,800 22,050         4 14,700 12,600 13,650         5 14,700 9,450 12,600 Total $73,500 $75,600 $100,800

Explanation / Answer

Answer:

1. Cash payback period:

We can see cash pay back period is in between year 3 and year 4 as cumulative cash flow is $144,900 in year 3 and $193,200 in year 4. $168,000 can be found between them.

Cash payback period = 3 years + (168,000 - 144,900 / 193,200 - 144,900)

= 3.48 years or 3 years and 6 months(approx)

We can see cash pay back period is in between year 3 and year 4 as cumulative cash flow is $163,800 in year 3 and $213,150 in year 4. $183,750 can be found between them.

Cash payback period = 3 years + (183,750 - 163,800 / 213,150 - 163,800)

= 3.40 years or 3 years and 5 months(approx)

2. Net present value:

3. Annual rate of return:

Project Edge = Average annual income * 100 / Cost of project

= 14,700 *100 / 168,000 = 8.75%

Project Clayton = Average annual income * 100 / Cost of project

= (75,600 / 5) * 100 / 183,750 = 8.23%

Project Edge(In $) Year 1 Year 2 Year 3 Year 4 Year 5 Annual net income    14,700.00                 14,700.00                          14,700.00             14,700.00      14,700.00 Add: Depreciation ($168,000/5)    33,600.00                 33,600.00                          33,600.00             33,600.00      33,600.00 Cash inflow    48,300.00                 48,300.00                          48,300.00             48,300.00      48,300.00 Cumulative inflow    48,300.00                 96,600.00                       144,900.00           193,200.00    241,500.00

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