U3 Company is considering three long-term capital investment proposals. Each inv
ID: 2766492 • Letter: U
Question
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 $171,200 $187,250 $202,000 Annual net income: Year 1 14,980 19,260 28,890 2 14,980 18,190 24,610 3 14,980 17,120 22,470 4 14,980 12,840 13,910 5 14,980 9,630 12,840 Total $74,900 $77,040 $102,720 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 PV table. Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Bono years Project Edge years Project Clayton years Compute the net present value for each project. (Round answers to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Project Bono Project Edge Project Clayton Net present value $ $ $ 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 Annual rate of return % % % Rank the projects on each of the foregoing bases. Which project do you recommend? Project Cash Payback Net Present Value Annual Rate of Return Bono Edge Clayton The best project is .
Explanation / Answer
Since tax rate has not been given, tax saving on depreciation has not been considered.
All three projects are giving negative NPV, negative IRR and not paying back its investment hence all the three projects shouldn’t be selected.
Bono
Edge
Clayton
NPV
-120985
133362.12
129158.34
IRR
-33%
-36%
32%
Bono
Dis factor @15%
Discounted cashflow
Cumulative cashflows
Capital investment
-171200
1
-171200
-171200
1
14980
0.870
13,026.09
-1,58,173.91
2
14980
0.756
11,327.03
-1,46,846.88
3
14980
0.658
9,849.59
-1,36,997.29
4
14980
0.572
8,564.86
-1,28,432.42
5
14980
0.497
7,447.71
-1,20,984.72
NPV
-120984.7166
IRR
-33%
Edge
Dis factor @15%
Discounted cashflow
Cumulative cashflows
Capital investment
-187250
1
-187250
-187250
1
19260
0.870
16,747.83
-1,70,502.17
2
18190
0.756
13,754.25
-1,56,747.92
3
17120
0.658
11,256.68
-1,45,491.24
4
12840
0.572
7,341.31
-1,38,149.93
5
9630
0.497
4,787.81
-1,33,362.12
NPV
-133362.1191
IRR
-36%
Clayton
Dis factor @15%
Discounted cashflow
Cumulative cashflows
Capital investment
-202000
1
-202000
-202000
1
28890
0.870
25,121.74
-1,76,878.26
2
24610
0.756
18,608.70
-1,58,269.57
3
22470
0.658
14,774.39
-1,43,495.18
4
13910
0.572
7,953.09
-1,35,542.09
5
12840
0.497
6,383.75
-1,29,158.34
NPV
-1,29,158.34
IRR
-32%
Bono
Edge
Clayton
NPV
-120985
133362.12
129158.34
IRR
-33%
-36%
32%
Bono
Dis factor @15%
Discounted cashflow
Cumulative cashflows
Capital investment
-171200
1
-171200
-171200
1
14980
0.870
13,026.09
-1,58,173.91
2
14980
0.756
11,327.03
-1,46,846.88
3
14980
0.658
9,849.59
-1,36,997.29
4
14980
0.572
8,564.86
-1,28,432.42
5
14980
0.497
7,447.71
-1,20,984.72
NPV
-120984.7166
IRR
-33%
Edge
Dis factor @15%
Discounted cashflow
Cumulative cashflows
Capital investment
-187250
1
-187250
-187250
1
19260
0.870
16,747.83
-1,70,502.17
2
18190
0.756
13,754.25
-1,56,747.92
3
17120
0.658
11,256.68
-1,45,491.24
4
12840
0.572
7,341.31
-1,38,149.93
5
9630
0.497
4,787.81
-1,33,362.12
NPV
-133362.1191
IRR
-36%
Clayton
Dis factor @15%
Discounted cashflow
Cumulative cashflows
Capital investment
-202000
1
-202000
-202000
1
28890
0.870
25,121.74
-1,76,878.26
2
24610
0.756
18,608.70
-1,58,269.57
3
22470
0.658
14,774.39
-1,43,495.18
4
13910
0.572
7,953.09
-1,35,542.09
5
12840
0.497
6,383.75
-1,29,158.34
NPV
-1,29,158.34
IRR
-32%
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