Question

Problem 27-01A (Video) 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 Project Clayton 208,000 Capital investment Annual net income: Year 1 $180,250 14,420 14,420 14,420 14,420 14,420 18,540 17,510 16,480 12,360 9,270 27,810 23,690 21,630 12,360 Total 2,100 $74,160$98,880 Depreciation is computed by the straight ne method with no salvage value. The company's cost o apital is 15%. (Assume that cash flows occür evenly throughout the year) Click here to view PV table Compute the cash payback period for each project. (Round answers to 2 decimal places, eg, 1050) Project Bone Project Edge Project Clayton Activate Windows 3:23 P "羽2/9/201 BACK SPACE 8 9 4 ENTER ← 」 SHIFT END ALT CTR ぐ P55-A520

Answer 1

Payback Period

Project Bono= 164,800/(14,420+32,960)= 3.48 Years

Project Edge

Year	Cash Flow	Cumulative Cash Flow
1	$ 54,590.00	$                       54,590.00
2	$ 53,560.00	$                     108,150.00
3	$ 52,530.00	$                     160,680.00
4	$ 48,410.00	$                     209,090.00
5	$ 45,320.00	$                     254,410.00

$180,250– $160,680 = $19,570

=19570/48410=0.40

So the payback period is 3.4 Years

Project Clayton

Year	Cash Flow	Cumulative Cash Flow
1	$ 69,410.00	$                           69,410.00
2	$ 65,290.00	$                        134,700.00
3	$ 63,230.00	$                        197,930.00
4	$ 54,990.00	$                        252,920.00
5	$ 53,960.00	$                        306,880.00

$208,000– $197,930 = $10,070

=10,070/54,990=0.18

So the payback period is 3.18 Years

2)Net Present Value

Project Bano = (47,380 x 3.35216) - 164,800

Negative Net present Value = (5974.66)

		Project Edge		Project Clayton
Year	Discount Factor	Cash Flow	PV	Cash Flow	PV
1	0.86957	54,590.00	$    47,469.83	$ 69,410.00	$    60,356.85
2	0.75614	53,560.00	$    40,498.86	$ 65,290.00	$    49,368.38
3	0.65752	52,530.00	$    34,539.53	$ 63,230.00	$    41,574.99
4	0.57175	48,410.00	$    27,678.42	$ 54,990.00	$    31,440.53
5	0.49718	45,320.00	$    22,532.20	$ 53,960.00	$    26,827.83
Total Inflow			$ 172,718.83		$ 209,568.59
Outflow			$ 180,250.00		$ 208,000.00
Net Present Value			$    (7,531.17)		$      1,568.59

3)

Project Bono = $14,420 ÷ [($164,800 + $0) ÷ 2] = 17.5%.

          Project Edge = $14,832÷ [($180,250 + $0) ÷ 2] = 16.5%.

          Project Clayton = $19,776 ÷ [($208,000 + $0) ÷ 2] = 19.01%.

4)

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.