Problem 26-1A (Part Level Submission) U3 Company is considering three long-term

Question

Problem 26-1A (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 $164,800 Project Edge Project Clayton $206,000 Capital investment Annual net income: Year 1 $180,250 14,420 14,420 14,420 14,420 14,420 $72,100 18,540 17,510 16,480 12,360 9,270 $74,160 27,810 23,690 21,630 13,390 12,360 $98,880 4 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.) ew PV table Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Bono Project Edge Project Clayton years years years

Explanation / Answer

Depreciation under Straightline method = Cost / useful life

Annual cash flows for project Bono = Net Income + Depreciation

= 14,420 + 32,960

= 47,380

Pay back period = Initial Investment / Annual cash flows

= 164,800 / 47,380

= 3.48 years

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Project Edge

Payback period = 3 years + (180,250-160,680)/48,410

= 3 + 0.4

= 3.4 years

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Project Clayton

Payback period = 3 years + (206,000-196,730)/54,590

= 3 + 0.17

= 3.17 years

Project Bono 32,960 (164,800/5) Project Edge 36,050 (180,250/5) Project Clayton 41,200 (206,000/5)

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