Question

Problem 25-01A 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 $172,800 Project Edge $189,000 Project Clayton $206,000 Capital investment Annual net income: Year 1 NMT in 15,120 15,120 15,120 15,120 15,120 19,440 18,360 17,280 12,960 9,720 $77,760 29,160 24,840 22,680 14,040 12,960 $103,680 Total $75,600 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 the factor 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

Answer 1

Calculation of payback period
depreciation = 172800/5 = 34560
project bono
payback period = capital investment/cash inflow
payback period = 172800/(15120+34560) = 3.48 years
Project Edge
depreciation = 189000/5 = 37800
Years	annual net income (a)	depreciation(b)	cash flow(a)+(b)	cumulative cash flow
1	19440	37800	57240	57240
2	18360	37800	56160	113400
3	17280	37800	55080	168480
4	12960	37800	50760	219240
5	9720	37800	47520	266760
payback period = (189000-168480)/(219240-168480) = 0.40
payback period = 3+0.40 = 3.40years
project Clayton
depreciation = 206000/5 = 41200
Years	annual net income (a)	depreciation(b)	cash flow(a)+(b)	cumulative cash flow
1	29160	41200	70360	70360
2	24840	41200	66040	136400
3	22680	41200	63880	200280
4	14040	41200	55240	255520
5	12960	41200	54160	309680
payback period = (206000-200280)/(255520-200280) = 0.10
payback period = 3years+0.10 = 3.10years
Net present value
project bono
year	cash inflow	pvf@15%	present value
1	49680	0.86957	43200
2	49680	0.75614	37565.0352
3	49680	0.65752	32665.5936
4	49680	0.57175	28404.54
5	49680	0.49718	24699.9024
	total		166535.0712
	investment		-172800
	net present value		-6264.9288
Project Edge
year	cash inflow	pvf@15%	present value
1	57240	0.86957	49773.91
2	56160	0.75614	42464.82
3	55080	0.65752	36216.20
4	50760	0.57175	29022.03
5	47520	0.49718	23625.99
	total		181102.96
	investment		-189000
	net present value		-7897.04
project Clayton
year	cash inflow	pvf@15%	present value
1	70360	0.86957	61182.61
2	66040	0.75614	49935.49
3	63880	0.65752	42002.38
4	55240	0.57175	31583.47
5	54160	0.49718	26927.27
	total		211631.21
	investment		-206000
	net present value		5631.21
Annual rate of return = average net profit/average investment
project bono = 15120/(172800/2) = 17.5%
project edge = (77760/5)/(189000/2) = 16.46%
project clayton = (103680/5)/(206000/2) = 20.13%
Rank
project	cash payback	net present value	annual rate of return
Bono	3	2	2
Edge	2	3	3
Clayton	1	1	1
the best project is Clayton