Question

Problem 24-1A 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 $180,250 Project Clayton $204,000 Capital investment Annual net income: Year 1 14,420 14,420 14,420 14,420 14,420 $72,100 18,540 17,510 16,480 12,360 27,810 23,690 21,630 13,390 12,360 $98,880 9,270 Total $74,160 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. X Your answer is incorrect. Try again. 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

Answer 1

A) Payback period - Project Bano Project Edge - Dep per year 180250 /5 36050 per year Project Clayton Dep per year= 204000 /5 40800 per year Depreciation per year 164800/5 $32,960 Cash payback period 164800 /(1442032960) = 3.48 years Year Annual Net income Dep. Value Cumulative Cash flow Year Annual Net income Dep. Value Cumulative Cash flow 40800 18540 27810 1 36050 54590 1 68610 108150 40800 133100 2 17510 36050 2 23690 3 16480 36050 160680 3 21630 40800 195530 12360 4 36050 209090 4 13390 40800 249720 36050 12360 40800 302880 9270 254410 5 74160 182050 160680 $ 21,370 21370/(36050 +12360) 0.44 Payback period 3.44 years 98880 204000 195530 $8,470 8470/(13390 40800) 0.16 Payback period 3.16 years B) Calculation of NPV Project Bano Project edge Project Clayton Cash inflow Year Discount Factor Cash inflow PV Cash inflow PV PV 0.86957 1 47380 41200.2266 54590 47469.826 68610 59661.1977 47380 2. 0.75614 35825.9132 53560 40498.858 64490 48763.4686 62430 41048.9736 3 0.65752 47380 31153.2976 52530 34539.526 48410 27678.418 4 0.57175 47380 27089.515 54190 30983.1325 53160 26430.0888 302880 206886.861 0.49718 47380 23556.3884 45320 22532.198 254410 172718.83 Total 236900 158825.3408 Investment 164800 180250 204000 -7531.175 NPV -5974.6592 2886.8612 C) Annual Rate of Return Project bano 14420/ (164800 + 0)/2 17.50 % Project Edge (74160 /5)/(180250 +0)/2 16.46 % Project clayton (98880/5)/ (204000 +0)/2 19.39 % Cash payback D) Ranking NPV ARR. Bano 3 2 Edge Clayton 2 3 3 1 1 1