Problem 24-1A Problem 24-1A Henkel Company is considering three long-term capita

Question

Problem 24-1A

Problem 24-1A

Henkel 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 Kilo Project Lima Project Oscar Capital investment $161,200 $171,600 $198,900 Annual net income:     Year 1 13,520 18,200 28,600 2 13,520 17,160 23,400 3 13,520 16,120 22,360 4 13,520 11,960 14,040 5 13,520 8,840 13,000 Total $67,600 $72,280 $101,400

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.)

Click here to view the factor table.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Explanation / Answer

a) Computation of the cash payback period for each project

Project Kilo

Depreciation per year = $161,200/5 = $32,240

Cash payback period = $161,200 / ($13,520 + $32,240) = 3.52 years

Project Lima

Depreciation per year = $171,600/5 = $34,320

Annual Cash Inflow

Depreciation

Value

Cumulative

Cash Inflow

$171,600 - $154,440 = $17,160

$17,160 / ($11,960 + $34,320) = 0.37 years

Cash payback period = 3.37 years

Project Oscar

Depreciation per year = $198,900/5 = $39,780

Annual Cash Inflow

Depreciation

Value

Cumulative

Cash Inflow

$198,900 - $193,700 = $5,200

$5,200 / ($14,040 + $39,780) = 0.10 years

Cash payback period = 3.10 years

b) Computation of the net present value for each project

Project Kilo

Project Lima

Project Oscar

c) Compute the annual rate of return for each project

Project Kilo = $13520 / [($161200 + $0) / 2] = 16.77%

Project Lima = $14456 / [($171600 + $0) / 2] = 16.85%

Project Oscar = $20280 / [($198900+ $0) / 2] = 20.39%

d) Rank the projects on each of the foregoing bases

Annual Rate

of Return

Project Oscar is recommended as it is the best project out of all the three projects.

Year

Annual Cash Inflow

Depreciation

Value

Cumulative

Cash Inflow

1 18,200 34,320 52520 2 17,160 34,320 104000 3 16,120 34,320 154440 4 11,960 34,320 200720 5 8,840 34,320 243880

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