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		$164,800		$180,250		$206,000
Annual net income:
Year  1		14,420		18,540		27,810
2		14,420		17,510		23,690
3		14,420		16,480		21,630
4		14,420		12,360		13,390
5		14,420		9,270		12,360
Total		$72,100		$74,160		$98,880

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.)

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New attempt is in progress. Some of the new entries may impact the last attempt grading.Your answer is incorrect.

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

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New attempt is in progress. Some of the new entries may impact the last attempt grading.Your answer is incorrect.

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

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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 %

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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

The best project is select a project                                                                      ClaytonEdgeBono.

Answer 1

ANSWER

Project Bono							project edge							project clayton
	cash outflow	164800						cash outflow	180250						cash outflow	206000
	Year	net income	dep	before dep income	present value @15%	present value of cash flow	cumulative values for Pay back period		net income	dep	before dep income	present value @15%	present value of cash flow	cumulative cash flow		net income	dep	before dep income	present value @15%	present value of cash flow	cumulative values for Pay back period
	1	14420	32960	47380	0.8695652	41200	47380		18,540	36,050	54,590	0.869565	47469.57	54,590		27,810	41,200	69,010	0.869565	60008.7	69,010
	2	14420	32960	47380	0.7561437	35826.087	94760		17510	36050	53,560	0.756144	40499.05	108,150		23690	41200	64,890	0.756144	49066.16	133,900
	3	14420	32960	47380	0.6575162	31153.119	142140		16480	36050	52,530	0.657516	34539.33	160,680		21630	41200	62,830	0.657516	41311.74	196,730
	4	14420	32960	47380	0.5717532	27089.669	22660	amount to be recovered in year 4	12360	36050	48,410	0.571753	27678.57	19,570	amount to be recovered in year 4	13390	41200	54,590	0.571753	31212.01	9,270	amount to be recovered in year 4
	5	14420	32960	47380	0.4971767	23556.234			9270	36050	45,320	0.497177	22532.05			12360	41200	53,560	0.497177	26628.79
					sum of present value of cash flow	158825.11						sum of present value of cash flow	172718.6						sum of present value of cash flow	208227.4
					cash outflow	164800						cash outflow	180250						cash outflow	206000
					NPV	-5974.891						NPV	-7531.43						NPV	2227.399
					Pay back period	3.4782609	Years					Pay back period	3.404255	Years					Pay back period	3.169811	Years
				Accounting rate of return	average profit/ initial investment *100	8.75	percent				Accounting rate of return	average profit/ initial investment *100	8.228571	percent				Accounting rate of return	average profit/ initial investment *100	9.6	percent
				average profit	14,420						average profit	14,832						average profit	19,776
				investment	164800						investment	180250						investment	206000
				Project Clayton should be selected as it is having positive NPV highest rate of return and low pay back period

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