LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO VIDEO (a) Henkel Company is consi
ID: 2726409 • Letter: L
Question
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(a)
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 $168,950 $179,850 $214,500 Annual net income: Year 1 14,170 19,075 29,975 2 14,170 17,985 24,525 3 14,170 16,895 23,435 4 14,170 12,535 14,715 5 14,170 9,265 13,625 Total $70,850 $75,755 $106,275
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.) (Refer the below table)
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Explanation / Answer
Project Kilo
Project Kilo
year net income depreciation cash flow cumulative cash flows 0 168950 168950 1 14,170 33,790 47,960 47,960 2 14,170 33,790 47,960 95,920 3 14,170 33,790 47,960 143,880 4 14,170 33,790 47,960 191,840 5 14,170 33,790 47,960 239,800 calculation of depreciation depreciation 168950 / 5 depreciation 33790 calculation of payback period pay back period number of years required to collect amount of investment form the cash flows initial investment 168950 pay back period 3 + ( 168950 - 143880 ) / 47960 pay back period 3 + 25070 / 47960 pay back period 3 + 0.52 pay back period 3.52 Project Lima year net income depreciation cash flow cumulative cash flows 0 179850 179850 1 19,075 35,970 55,045 55,045 2 17,985 35,970 53,955 109,000 3 16,895 35,970 52,865 161,865 4 12,535 35,970 48,505 210,370 5 9,265 35,970 45,235 255,605 calculation of depreciation depreciation 179850 / 5 depreciation 35970 calculation of payback period initial investment 179850 pay back period 3 + ( 179850 - 161865 ) / 35970 pay back period 3 + 17985 / 35970 pay back period 3 + 0.50 pay back period 3.50 Project Oscar year net income depreciation cash flow cumulative cash flows 0 214500 214,500 1 29,975 42,900 72,875 72,875 2 24,525 42,900 67,425 140,300 3 23,435 42,900 66,335 206,635 4 14,715 42,900 57,615 264,250 5 13,625 42,900 56,525 320,775 calculation of depreciation depreciation 214500 / 5 depreciation 42900 calculation of payback period initial investment 214500 pay back period 3 + ( 214500 - 206635 ) / 42900 pay back period 3 + 7865 / 42900 pay back period 3 + 0.18 pay back period 3.18Related Questions
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