Problem 24-1A (Part Level Submission) (a) Open Show Work LINK TO TEXT LINK TO TE

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Problem 24-1A (Part Level Submission)

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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.
Project Bono Project Edge Project Clayton Capital investment $168,000 $183,750 $210,000 Annual net income: Year  1 14,700 18,900 28,350         2 14,700 17,850 24,150         3 14,700 16,800 22,050         4 14,700 12,600 13,650         5 14,700 9,450 12,600 Total $73,500 $75,600 $100,800
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

Payback period for Project Bono:

= Initial Investment / Annual Cash Inflow = 168,000 / 48,300 = 3.48 Years

Payback period for Project Edge:

= 3 + (183750 - 163800)/(213150-163800)

= 3 + 0.40 = 3.40 Years

Payback period for Project Clayton:

= 3 + [(256,200 - 210,000) / (256,200-200,550)]

= 3 + 0.83 = 3.83 Years

Project Bono Project Edge Project Clayton Year Net Income Depreciation Annual Cash Inflow Net Income Depreciation Annual Cash Inflow Cumulative Cash Inflow Net Income Depreciation Annual Cash Inflow Cumulative Cash Inflow 1          14,700                33,600          48,300                          18,900               36,750            55,650             55,650          28,350               42,000          70,350           70,350 2          14,700                33,600          48,300                          17,850               36,750            54,600          1,10,250          24,150               42,000          66,150       1,36,500 3          14,700                33,600          48,300                          16,800               36,750            53,550          1,63,800          22,050               42,000          64,050       2,00,550 4          14,700                33,600          48,300                          12,600               36,750            49,350          2,13,150          13,650               42,000          55,650       2,56,200 5          14,700                33,600          48,300                             9,450               36,750            46,200          2,59,350          12,600               42,000          54,600       3,10,800

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