Problem 24-1A (part level submission) (a) Problem 24-1A (part level submission)

Question

Problem 24-1A (part level submission)

(a)

Problem 24-1A (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 Project Lima Project Oscar Capital investment $161,200 $171,600 $202,800 Annual net income:     Year 1 13,520 18,200 28,600 2 13,520 17,160 23,400 3 13,520 16,120 22,360 4 13,520 11,960 14,040 5 13,520 8,840 13,000 Total $67,600 $72,280 $101,400

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

Henkel company Computation of depreciation included in the Annual Net Income Project Kilo Project Lima Project Oscar Capital Investment $        1,61,200 $            1,71,600 $         2,02,800 Salvage value 0 0 0 Useful life (years) 5 5 5 Depreciation on straight line method $           32,240 $                34,320 $             40,560 The Annual net income to be increased by the amount of depreciation to calculate Annual net cashflow Statement of Project Annual Cashflow Project Kilo Project Lima Project Oscar Capital Investment $        1,61,200 $            1,71,600 $         2,02,800 Year 1 $           45,760 $                52,520 $             69,160 Year 2 $           45,760 $                51,480 $             63,960 Year 3 $           45,760 $                50,440 $             62,920 Year 4 $           45,760 $                46,280 $             54,600 Year 5 $           45,760 $                43,160 $             53,560 Total cash inflows $        2,28,800 $            2,43,880 $         3,04,200 Cash Payback period for each project (years) 3.52 3.37 3.12 Rank of the Projects 3 2 1 Workings Project Kilo $137,280 will be paid off after 3 years. Balance $23,920 to be paid off during the fourth year. 23,920 / 45,760 = 0.52 of a year Payback period = 3.52 years. Project Lima $154,440 will be paid off after 3 years. Balance $17,160 to be paid off during the fourth year. 17,160 / 46,280 = 0.37 of a year Payback period = 3.37 years. Project Oscar $196,040 will be paid off after 3 years. Balance $6,760 to be paid off during the fourth year. 6,760 / 46,280 = 0.12 of a year Payback period = 3.12 years.

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