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		$168,000		$183,750		$210,000
Annual net income:
Year  1		14,700		18,900		28,350
2		14,700		17,850		24,150
3		14,700		16,800		22,050
4		14,700		12,600		13,650
5		14,700		9,450		12,600
Total		$73,500		$75,600		$100,800

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.)

Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)

Project Bono		enter the cash payback period in years rounded to 2 decimal places	years
Project Edge		enter the cash payback period in years rounded to 2 decimal places	years
Project Clayton		enter the cash payback period in years rounded to 2 decimal places	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		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places

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		enter percentages rounded to 2 decimal places %		enter percentages rounded to 2 decimal places %		enter percentages rounded to 2 decimal places %

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		select a ranking number                                                                      132		select a ranking number                                                                      231		select a ranking number                                                                      321
Edge		select a ranking number                                                                      132		select a ranking number                                                                      123		select a ranking number                                                                      123
Clayton		select a ranking number                                                                      132		select a ranking number                                                                      123		select a ranking number                                                                      123

Answer 1

Formula of Payback Period when Same Amount of Cash Inflows in each year:

Initial Investment / Net Annual Cash inflows

In Case of Bono, Payback Period = 11.43 Years (168000/147000)

When Cash Inflows are different in each year then Payback Period Calculation is as follows:

Edge payback Period calculation

Year	Cash Inflow/Outflow	Cumulative Flow
0	-183750	-183750
1	18900	-164850
2	17850	-145950
3	16800	-127050
4	12600	-108150
5	9450	-89250

=89250/9450 + 5 Years = 9.44 Yeras + 5 Yeras = 14.44 yeras.

Clayton Payback Period calculation

Year	Cash Inflow/Outflow	Cumulative Flow
0	-210000	-210000
1	28350	-181650
2	24150	-157500
3	22050	-135450
4	13650	-121800
5	12600	-109200

=109200/12600 + 5 Years = 8.66 Years+ 5 years =13.66 years.

Formula For Net Presesnt Value Calculation :Present value of Cash Inflow- PV Of Cash Outflow

Bono's NPV

Year	Cash Flows	Discounting factor	Present Value
0	-168000	1	-168000
1	14700	0.86956	12782.532
2	14700	0.75614	11115.258
3	14700	0.65752	9665.544
4	14700	0.57145	8400.315
5	14700	0.49718	7308.546
			49272.195

NPV=49272.195- (168000) =(118727.81)

Edge's NPV

Year	Cash Flows	Discounting factor	Present Value
0	-183750	1	-183750
1	18900	0.86956	16434.684
2	17850	0.75614	13497.099
3	16800	0.65752	11046.336
4	12600	0.57145	7200.27
5	9450	0.49718	4698.351
			52876.74

NPV= 52876.74-(183750) =(115123.26)

Claytons NPV

Year	Cash Flows	Discounting factor	Present Value
0	-210000	1	-210000
1	28350	0.86956	24652.026
2	24150	0.75614	18260.781
3	22050	0.65752	14498.316
4	13650	0.57145	7800.2925
5	12600	0.49718	6264.468
			71475.8835

NPV=71475.88-(210000) =(96524.12)

Annual Rate of Return formula:Avarage Annual Earnings After Taxes/ Initial Investment*100

Name	Bono	Edge	Clayton
Year	Income	Income	Income
1	14700	18900	28350
2	14700	17850	24150
3	14700	16800	22050
4	14700	12600	13650
5	14700	9450	12600
Total	73500	75600	100800
Avarage	14700	15120	20160
Initial Investent	168000	183750	210000
ARR	8.75	8.23	9.60

As Per Payback Period Bono Project is Recommended.

As per NPV Clayton is Recommended.

As per ARR Clayton Recommended.