Sanchez Corporation is considering three long-term capital investment proposals.

Question

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

Brown Red Yellow Capital investment

$190,570 $221,360 $251,750 Annual net income:

Year 1 25,478 20,021 26,369

2 16,410 20,021 24,488

3 13,278 20,021 23,046

4 10,170 20,021 17,117

5 8,236 20,021 20,364

Total $ 73,572 $100,105 $111,384

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%. Compute net present value for each project. please show me how using aTI BA II Plus

Explanation / Answer

Sanchez Corporation Details Project Brown Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Capital Investment          (190,570) Annual Net Income                25,478             16,410               13,278                   10,170             8,236 Add Depreciation                38,114             38,114               38,114                   38,114           38,114 Net Cash Flow          (190,570)                63,592             54,524               51,392                   48,284           46,350 PV factor @12%                         1                0.8929             0.7972               0.7118                   0.6355           0.5674 PV of Net Cash Flow    (190,570.00)          56,778.57       43,466.20         36,579.81             30,685.35     26,300.23 NPV = $       3,240.17 Project Red Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Capital Investment          (221,360) Annual Net Income                20,021             20,021               20,021                   20,021           20,021 Add Depreciation                44,272             44,272               44,272                   44,272           44,272 Net Cash Flow          (221,360)                64,293             64,293               64,293                   64,293           64,293 PV factor @12%                         1                0.8929             0.7972               0.7118                   0.6355           0.5674 PV of Net Cash Flow    (221,360.00)          57,404.46       51,253.99         45,762.49             40,859.36     36,481.57 NPV = $    10,401.88 Project Yellow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Capital Investment          (251,750) Annual Net Income                26,369             24,488               23,046                   17,117           20,364 Add Depreciation                50,350             50,350               50,350                   50,350           50,350 Net Cash Flow          (251,750)                76,719             74,838               73,396                   67,467           70,714 PV factor @12%                         1                0.8929             0.7972               0.7118                   0.6355           0.5674 PV of Net Cash Flow    (251,750.00)          68,499.11       59,660.40         52,241.82             42,876.50     40,125.02 NPV = $    11,652.85

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