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 $161,600 $176,750 $204,000 Annual net income: Year  1 14,140 18,180 27,270         2 14,140 17,170 23,230         3 14,140 16,160 21,210         4 14,140 12,120 13,130         5 14,140 9,090 12,120 Total $70,700 $72,720 $96,960 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 132 231 321 Edge 132 123 123 Clayton 132 123 123 The best project is Bono? Edge? or Clayton? .

Answer 1

161,600 Project bono Capital investment / Years Depreciation Add: Net income=70700/5 annual cash inflow=net income + depreciation PBP = initial investment /Annual cash inflow = 161600/46460 32320 14140 46460 3.48 years 176,750 Project Edge Capital investment / Years Depreciation year 35350 net income depreciation Initial investment cash flow cumulative cash flow c=a+b+C -176750 - 176750 -176750 18,180 35350 53530 -123220 17,170 35350 525201 - 70700 16, 160 35350 51510 -19190 12, 120 35350 47470 9,090 35350 44440 72720 28280 PBP = 3+ (19190/47470) 3.40 years 204,000 Project clayton Capital investment / Years Depreciation 5 year 40800 net income depreciation initial investment cash flow cumulative cash flow c=a+b+c -204000 -204000 -204000 27,270 40800 68070 -135930 23,230 40800 64030 -71900 21, 210 40800 62010 -9890 13,130 40800 539301 44040 12,120 40800 52920 96960 5 PBP = 3+ (9890/53930) 3.18 years

2.calculation of NPV cash flows Project Edge year Project bono Project clayton PV factor at 15% 161,600.00 - 46, 460.00 46, 460.00 46,460.00 46, 460.00 46,460.00 176,750.00 - 53,530.00 52,520.00 51,510.00 47,470.00 44,440.00 204,000.00 68,070.00 64,030.00 62,010.00 53,930.00 52,920.00 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 Project bono ad 161,600 40,400 35,130 30,548 26,564 23,099 -5859 Present value Project Edge Project clayton bºd cid 176,750 204,000 46,548 59,192 39,712 48,416 33,869 40,773 27,141 30,834 22,095 26,311 -7385 1525 NPV Project bono 70,700 Project Edge 72,720 Project clayton 96,960 3.Annual rate of return = average net income/average capital investment total net income / Years average net income = total net income/5 average capital investment 51 14140 80800 (161600+0)/2 17.50% 14544 19392 88375 102000 (176750+0)/2 (204000+0)/2 16.46% 19.01% Annual rate of return cash Payback NPV ARR Ranking Project Bono edge clayton - 21 2131 11 11 1 Hence the best project is Clayton.