Will thumbs up for correct answers! Section \"a\" is posted below: U3 Company is

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Will thumbs up for correct answers!

Section "a" is posted below:

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 Clayton $200,000 Capital investment S160,000 S175,000 Annual net income 1 14,000 2 14,000 3 14,000 4 14,000 5 14,000 S70,000 18,000 17,000 16,000 12,000 9,000 $72,000 27,000 23,000 21,000 13,000 12,000 $96,000 ear 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.) (a) Compute the cash payback period for each project. (Round to two decimals.) (b) Compute the net present value for each project. (Round to nearest dollar.) (c) Compute the annual rate of return for each project. (Round to two decimals.) Hint: Use average annual net income in your computation.) (d) Rank the projects on each of the foregoing bases. Which project do you recommend? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Explanation / Answer

Following are the NPV of the three projects in contention:-

1. Project Bono:-

Since, project cash flows for all the years from 1 to 5 are equal, we will calculate npv as follows:-

(Annual cash flows for all the years x cumulative PV @ 15%) - cash outflow in beginning

(46000 x 3.35216) - 1600000

= $-5800.64

2. Project Edge:-

Year Total cash flows. Present Value@ 15%

1 53000 46086.95

2 52000 39310.4

3 51000 33533.52

4 47000 26872.25

5 44000 21875.92

Total. 143479.04

Less. 175000

Therefore NPV is $ 31520.96

3. Project Clayton

Year Annual Cash flows PV @ 15%

1 67000 58261.19

2 63000 47636.82

3 61000 40108.72

4 53000 30302.75

5 52000 25853.36

Total cash flows 202162.84

Cash outflows 200000

Therefore NPV is $ 2162.84

Therefore,looking at all the project's NPV, Project Clayton with positive NPV is the best to work with.

  

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