Problem 26-5A (Part Level Submission) Henkel Company is considering three long-t

Question

Problem 26-5A (Part Level Submission) 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 $150,600 Project Lima $165,400 Project Oscar $200,400 Capital investment Annual net income 17,770 16,940 16,190 12,210 9,114 $72,224 Year 1 13,979 13,979 13,979 13,979 13,979 $69,895 27,036 22,850 21,100 13,189 12,120 $96,295 4 Total 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.) TABLE 1 Present Value of 1 Periods 4% 5% 6% 790 8% 9% 10% 11% 12% 15% 96154 95238 94340 0.93458 92593 91743 90909 90090 89286 86957 92456 90703 89000 0.87344 85734 84168 82645 .81162 79719 75614 88900 8638483962 0.81630 79383 77218 .75132 .73119 71178 65752 85480 82270 79209 0.76290 73503 70843 .68301 65873 63552 57175 59345 56743 49718 4 82193 78353 74726 0.7129968058 6499362092

Explanation / Answer

a.

Thus, Cash Payback period in all proposals are equal to Approx 4 Years.

Thus, based on above analysis, proposal OSCAR is Better.

Years Project Kilo Project Lima Project Oscar Cash flow Cumulative Cash Flow Cash flow Cumulative Cash Flow Cash flow Cumulative 0 -1,50,600.00 -1,50,600.00      -1,65,400.00 -1,65,400.00 -2,00,400.00 -2,00,400.00 1.00 44,099.00 -1,06,501.00 50,850.00 -1,14,550.00 67,116.00 -1,33,284.00 2.00 44,099.00 -62,402.00 50,020.00 -64,530.00 62,930.00 -70,354.00 3.00 44,099.00 -18,303.00 49,270.00 -15,260.00 61,180.00 -9,174.00 4.00 44,099.00 25,796.00 45,290.00 30,030.00 53,269.00 44,095.00 5.00 44,099.00 69,895.00 42,194.00 72,224.00 52,200.00 96,295.00

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