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.

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)

Correct answer. Your answer is correct.

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 Entry field with correct answer
15.5
%
Project Red Entry field with correct answer
18.2
%
Project Yellow Entry field with correct answer
18.0
%

Collapse question part
(b)
Compute the cash payback period for each project. (Round answers to 2 decimal place, e.g. 5.25.)

Cash Payback
Project Brown
years
Project Red
years
Project Yellow
years

Explanation / Answer

Computation of payback period:

1. Calculation of annual cash inflows:

2. Calculation of payback:

Payback Period:

Brown = 3 years + [(188850-174019)/(222258-174019)]

= 3.31 years

Red = 3 years + [(220410-192459)/(256612-192459)]

= 3.44 years

Yellow = 3 years + [(248370-223026)/(290124-223026)]

= 3.38 years

Year Brown Red Yellow Net income Dep Cash inflows Net income Dep Cash inflows Net income Dep Cash inflows 1 25104 37770 62874 20071 44082 64153 26239 49674 75913 2 16344 37770 54144 20071 44082 64153 24363 49674 74037 3 13231 37770 51001 20071 44082 64153 23402 49674 73076 4 10469 37770 48239 20071 44082 64153 17424 49674 67098 5 8169 37770 45939 20071 44082 64153 20365 49674 70039

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