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 $163,200 Project Edge $178,500 Project Clayton $204,000 Capital investment Annual net income: Year 14,280 14,280 14,280 14,280 14,280 $71,400 18,360 17,340 16,320 12,240 9,180 $73,440 27,540 23,460 21,420 13,260 12,240 $97,920 Total 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 LINK TO TEXT LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR PROBLEM 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

Answer 1

Project	Cash Payback	Rank	Net Present Value	Rank	Annual Rate of Return %	Rank
Bono	3.48	III	-5916	II	8.75	II
Edge	3.40	II	-7458	III	8.23	III
Claytown	2.74	I	2206	I	9.60	I
Best Project	Claytown
Years	0	1	2	3	4	5	Total
Project - Bono
Capital Investment	163200						163200
Net Annual Income		14280	14280	14280	14280	14280	71400
Add: Depreciation		32640	32640	32640	32640	32640	163200
Free Cash Flows		46920	46920	46920	46920	46920	234600
Cumulative Cash Flow		116280	69360	22440	-24480
Payback Period					3.48
PVF		0.8695652	0.7561437	0.6575162	0.5717532	0.4971767
Present Value of FCF		40800	35478	30851	26827	23328	157284
Present Value of FCF	157284
NPV	-5916	PV of FCF-Initial Outlay+PV of Termination Value(is zero)
Annualized ROR %	8.75	Avg. net annual income/Initial Investment*100
Project - Edge
Capital Investment	178500						178500
Net Annual Income		18360	17340	16320	12240	9180	73440
Add: Depreciation		35700	35700	35700	35700	35700	178500
Free Cash Flows		54060	53040	52020	47940	44880	251940
Cumulative Cash Flow		124440	71400	19380	-28560
Payback Period					3.40
PVF		0.8695652	0.7561437	0.6575162	0.5717532	0.4971767
Present Value of FCF		47009	40106	34204	27410	22313	171042
Present Value of FCF	171042
NPV	-7458	PV of FCF-Initial Outlay+PV of Termination Value(is zero)
Annualized ROR %	8.23	Avg. net annual income/Initial Investment*100
Project - Clayton
Capital Investment	204000						204000
Net Annual Income		27540	23460	21420	13260	12240	97920
Add: Depreciation		40800	40800	40800	40800	40800	204000
Free Cash Flows		68340	64260	62220	54060	53040	301920
Cumulative Cash Flow		110160	45900	-16320
Payback Period				2.74
PVF		0.8695652	0.7561437	0.6575162	0.5717532	0.4971767
Present Value of FCF		59426	48590	40911	30909	26370	206206
Present Value of FCF	206206
NPV	2206	PV of FCF-Initial Outlay+PV of Termination Value(is zero)
Annualized ROR %	9.60	Avg. net annual income/Initial Investment*100