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ID: 2792223 • Letter: L
Question
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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 $164,800 $180,250 $204,000 Annual net income: Year 1 14,420 18,540 27,810 2 14,420 17,510 23,690 3 14,420 16,480 21,630 4 14,420 12,360 13,390 5 14,420 9,270 12,360 Total $72,100 $74,160 $98,880
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
Computation of cash payback period of each project
Project Bono:
Depreciation = $164800 / 5 years
= $32960
Payback period = $164800 / $47380
= 3.48 times
$180250/5 years = $36050
$204000 / 5 years = $40800.
Edge :
Payback period = 3 + $19570 / $48410
= 3.40 times
Clayton:
Payback period = 3 + $8470 / $54190
= 3.16 times.
Computation of Net present value of each project
Computation of annual rate of return on each project
Annual rate of return = Average income / Average investment
Bono:
Annual rate of return = [($72100) / 5 ] / $164800 / 2
= $14420 / $82400
= 17.5%
Edge:
Annual rate of return = [($74160 / 5)] / $180250 /2
= $14832 / $90125
= 16.46%
Clayton:
Annual rate of return = [ ($98880 / 5)] / $204000 / 2
= $19776 / $102000
= 19.39%.
Year Edge Depreciation Cash flows Cummulative cash flows Clayton Depreciation Cash flows Cummulative cash flows 1 $18540 $36050 $54590 $54590 $27810 $40800 $68610 $68610 2 $17510 $36050 $53560 $108150 $23690 $40800 $64490 $133100 3 $16480 $36050 $52530 $160680 $21630 $40800 $62430 $195530 4 $12360 $36050 $48410 $209090 $13390 $40800 $54190 $249720 5 $9270 $36050 $45320 $254410 $12360 $40800 $53160 $302880Related Questions
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