Problem 24-1A (Part Level Submission) U3 Company is considering three long-term

Question

Problem 24-1A (Part Level Submission)

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.

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.)

Compute the annual rate of return for each project. (Hint: Use average annual net income in your computation.) (Round answers to 2 decimal places, e.g. 10.50.)

Project Bono Project Edge Project Clayton Capital investment $164,800 $180,250 $204,000 Annual net income: Year  1 14,420 18,540 27,810         2 14,420 17,510 23,690         3 14,420 16,480 21,630         4 14,420 12,360 13,390         5 14,420 9,270 12,360 Total $72,100 $74,160 $98,880

Explanation / Answer

Annual rate of return = Average net income*100/average investment :

Project Bono Project Edge Project Clayton Average annual net income 72100/5 = 14420 74160/5 = 14832 98880/5 = 19776 Average investment 164800/2 = 82400 180250/2 = 90125 204000/2 = 102000 Annual rate of return 17.5% 16.46% 19.39%

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