Need help computing the net present value... Sanchez Corporation is considering

Question

Need help computing the net present value...

Sanchez Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows.

Project

Brown

Red

Yellow

Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company’s minimum rate of return is the company’s cost of capital which is 12%.

Annual Retrun rate is as follows:

Annual rate of return

17.9%

Cash Payback period is as follows

Project Brown

Compute the net present value for each project.

Project

Brown

Red

Yellow

Capital investment $189,570 $218,390 $248,680 Annual net income: Year 1 25,399 20,133 26,339 2 16,068 20,133 24,346 3 13,449 20,133 23,126 4 10,011 20,133 17,316 5 8,150 20,133 20,144 Total $ 73,077 $100,665 $111,271

Explanation / Answer

Statement showing Cash flows Project Brown Project Red Project Yellow Particulars Time PVf@12% Amount PV Amount PV Amount PV Cash Outflows                       -                        1.00      (189,570.00)      (189,570.00)      (218,390.00)      (218,390.00)      (248,680.00)      (248,680.00) PV of Cash outflows = PVCO      (189,570.00)      (218,390.00)      (248,680.00) Cash inflows = Net Income + Depreciation                   1.00                 0.8929           63,313.00           56,529.46           63,811.00           56,974.11           76,075.00           67,924.11 Cash inflows = Net Income + Depreciation                   2.00                 0.7972           53,982.00           43,034.12           63,811.00           50,869.74           74,082.00           59,057.72 Cash inflows = Net Income + Depreciation                   3.00                 0.7118           51,363.00           36,559.17           63,811.00           45,419.41           72,862.00           51,861.73 Cash inflows = Net Income + Depreciation                   4.00                 0.6355           47,925.00           30,457.20           63,811.00           40,553.04           67,052.00           42,612.76 Cash inflows = Net Income + Depreciation                   5.00                 0.5674           46,064.00           26,137.95           63,811.00           36,208.08           69,880.00           39,651.79 PV of Cash Inflows =PVCI         192,717.91         230,024.37         261,108.10 NPV= PVCI - PVCO             3,147.91           11,634.37           12,428.10 Particulars Brown   Red Yellow Capital Investment      189,570.00         218,390.00         248,680.00 Life in years                   5.00                      5.00                      5.00 Depreciation per year        37,914.00           43,678.00           49,736.00

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