U3 Company is considering three long-term capital investment proposals. Each inv
ID: 2524772 • Letter: U
Question
U3 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 Bono Project Edge Project Clayton Capital investment $172,800 $189,000 $206,000 Annual net income: Year 1 15,120 19,440 29,160 2 15,120 18,360 24,840 3 15,120 17,280 22,680 4 15,120 12,960 14,040 5 15,120 9,720 12,960 Total $75,600 $77,760 $103,680
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.)
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Explanation / Answer
Answer:- Answer:- The net present value of Project Bono is -$122118.
The net present value of Project Edge is -$75593.
The net present value of Project Clayton is -$132457.
Explanation:-
Net present value of Project Bono = Present value of cash inflows – Total outflows
={($15120*3.352) - $172800}
=$50682 - $172800
= $78528-$130000
= -$122118
Net present value of Project Edge = Present value of cash inflows – Total outflows
={($19440*.870)+ ($18360*.756)+ ($17280*.658)+ ($12960*.572)+ ($9720*.497) - $189000}
=($16913+$13880+$11370+$7413+$4831) - $130000
= $54407-$130000
= -$75593
Net present value of Project Clayton = Present value of cash inflows – Total outflows
={($29160*.870)+ ($24840*.756)+ ($22680*.658)+ ($14040*.572)+ ($12960*.497) - $206000}
=($25369+$18779+$14923+$8031+$6441) - $130000
= $73543-$206000
= -$132457
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