(a) SHOW SOLUTION LINK TO TEXT (b) SHOW SOLUTION LINK TO TEXT (c) % Henkel Compa
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(a)
SHOW SOLUTION
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(b)
SHOW SOLUTION
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(c)
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Henkel Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.Project Kilo Project Lima Project Oscar Capital investment $164,300 $174,900 $210,600 Annual net income: Year 1 13,780 18,550 29,150 2 13,780 17,490 23,850 3 13,780 16,430 22,790 4 13,780 12,190 14,310 5 13,780 9,010 13,250 Total $68,900 $73,670 $103,350
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.)
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Explanation / Answer
Calculation of annual rate of return for each project:
For Project kilo:
Year
Annual Net income
Year 1
$ 13,780
Year 2
$ 13,780
Year 3
$ 13,780
Year 4
$ 13,780
Year 5
$ 13,780
Total
$ 68,900
Average Annual Net income (Total / 5) (A)
$ 13,780
Capital investment (B)
$ 164,300
Annual rate of return = A/B =
8.39%
For Project Lima:
Year
Annual Net income
Year 1
$ 18,550
Year 2
$ 17,490
Year 3
$ 16,430
Year 4
$ 12,190
Year 5
$ 9,010
Total
$ 73,670
Average Annual Net income (Total / 5) (A)
$ 14,734
Capital investment (B)
$ 174,900
Annual rate of return = A/B =
8.42%
For Project Oscar:
Year
Annual Net income
Year 1
$ 29,150
Year 2
$ 23,850
Year 3
$ 22,790
Year 4
$ 14,310
Year 5
$ 13,250
Total
$ 103,350
Average Annual Net income (Total / 5) (A)
$ 20,670
Capital investment (B)
$ 210,600
Annual rate of return = A/B =
9.81%
Calculation of annual rate of return for each project:
For Project kilo:
Year
Annual Net income
Year 1
$ 13,780
Year 2
$ 13,780
Year 3
$ 13,780
Year 4
$ 13,780
Year 5
$ 13,780
Total
$ 68,900
Average Annual Net income (Total / 5) (A)
$ 13,780
Capital investment (B)
$ 164,300
Annual rate of return = A/B =
8.39%
For Project Lima:
Year
Annual Net income
Year 1
$ 18,550
Year 2
$ 17,490
Year 3
$ 16,430
Year 4
$ 12,190
Year 5
$ 9,010
Total
$ 73,670
Average Annual Net income (Total / 5) (A)
$ 14,734
Capital investment (B)
$ 174,900
Annual rate of return = A/B =
8.42%
For Project Oscar:
Year
Annual Net income
Year 1
$ 29,150
Year 2
$ 23,850
Year 3
$ 22,790
Year 4
$ 14,310
Year 5
$ 13,250
Total
$ 103,350
Average Annual Net income (Total / 5) (A)
$ 20,670
Capital investment (B)
$ 210,600
Annual rate of return = A/B =
9.81%
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