Sanchez Corporation is considering three long-term capital investment proposals.
ID: 2490248 • Letter: S
Question
Sanchez Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows.
Project
Brown
Red
Yellow
Capital investment $188,850 $220,410 $248,370
Annual net income:
Year 1 25,104 20,071 26,239
2 16,344 20,071 24,363
3 13,231 20,071 23,402
4 10,469 20,071 17,424
5 8,169 20,071 20,365. Total $ 73,317 $100,355 $111,793
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%.
Collapse question part
(a)
Compute the annual rate of return for each project. (Round answers to 1 decimal place, e.g. 10.5%.)
Annual rate of return
Project Brown: ____
Project Red: ____
Project Yellow : ____
Explanation / Answer
Year
Project Brown
Project Red
Project Yellow
1
25,104
20,071
26,239
2
16,344
20,071
24,363
3
13,231
20,071
23,402
4
10,469
20,071
17,424
5
8,169
20,071
20,365
A
Total Returns
73,317
100,355
111,793
B
Average Returns(A /5 years)
14,663
20,071
22,359
C
Initial Investment
188,850
220,410
248,370
D
Average Investment(C/2)
94,425
110,205
124,185
E
Annual rate of Return(B/D)%
15.5
18.2
18.0
Year
Project Brown
Project Red
Project Yellow
1
25,104
20,071
26,239
2
16,344
20,071
24,363
3
13,231
20,071
23,402
4
10,469
20,071
17,424
5
8,169
20,071
20,365
A
Total Returns
73,317
100,355
111,793
B
Average Returns(A /5 years)
14,663
20,071
22,359
C
Initial Investment
188,850
220,410
248,370
D
Average Investment(C/2)
94,425
110,205
124,185
E
Annual rate of Return(B/D)%
15.5
18.2
18.0
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