Question

Please show all your work and identify formulas used.

P12.1A (LO 1, 2,5), AN 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. Compute annual rate of return, cash payback, and net present value C Excel Project Bono $160,000 Project Edge $175,000 Project Clayton $200,000 Capital investment Annual net income: Year 1 نا نية 14,000 14,000 14,000 14,000 14,000 $ 70,000 18,000 17,000 16,000 12,000 9,000 $ 72,000 27,000 23,000 21,000 13,000 12,000 $ 96,000 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.) Instructions a. Compute the cash payback period for each project. (Round to two decimals.) b. Compute the net present value for each project. (Round to nearest dollar.) E $(7,312); C $2,163 c. Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.) d. Rank the projects on each of the foregoing bases. Which project do you recommend?

Answer 1

Computation of Pay back period for each project In project Bono cash inflows are even then formula for calculating pay back period Initial Investment/Annual inflow Project Bono =160000/14000 11.43 years when the cash inflows are not even , we have to calculate cumulative cash flows, the point at which the full investment is recouped determines the pay back period. Project Edge and clayton will require further cash inflows beyond 5 years to be able to recoup the initial investment Calculation of NPV Project Bono Year 3 Year 4 Year 5 Capital Investment Year 0 Year 1 Year 2 $ 160,000.00 $ 14,000.00 $ 14,000.00 $ 1.00 $ 0.87 $ 0.76 $ 160,000.00 $ 12,173.84 $ 10,585.96 $ (113,069.90(Inflows - Outflows) Discount factor Total NPV $ 14,000.00 $ 14,000.00 $ 14,000.00 $ 0.66 $ 0.57 $ 0.50 $ 9,205.28 $ 8,004.50 $ 6,960.52 $ (113. Project Edge Year 3 Year 4 Year 5 Capital Investment Year 0 Year 1 Year 2 $ 175,000.00 $ 18,000.00 $ 17,000.00 1.00 $ 0.87 $ 0.76 $ 175,000.00 $ 15,652.08 $ 12,854.38 $ (124,637.60 (Inflows - Outflows) Discount factor Total NPV $ 16,000.00 $ 0.66 $ 10,520.32 $ 12,000.00 $ 0.57 $ 6,861.00 $ 9,000.00 $ 0.50 $ 4,474.62 Project clayton Year 3 Year 4 Year 5 Capital Investment Year 0 Year 1 Year 2 $ 200,000.00 | $ 27.000.00 $ 23,000.00 $ 1.00 $ 0.87 $ 0.76 $ 200,000.00 $ 23,478.12 $ 17,391.22 $ (131,923.83) (Inflows - Outflows) Discount factor Total NPV $ 21,000.00 $ 0.66 $ 13,807.92 $ 13,000.00 $ 0.57 $ 7,432.75 $ 12,000.00 $ 0.50 $ 5,966.16

c) Calculation of Annual rate of Return Annual Rate of Return = Average Annual Net Invome/Average Investment Project Bono Average Annual Net incom Average Investment Annual Rate of Return 14000|(70000/5) 80000 (160000/2) 17.50% Project Edge Average Annual Net incom Average Investment Annual Rate of Return 14400 (72000/5) 87500|(175000/2) 16.45% Project clayton Average Annual Net incom Average Investment Annual Rate of Return 19200|(96000/5) 100000 (200000/2) 19.20%

Project Bono Edge Clayton Cash pay back NPV 11.42 years $ (113,069.90) 0 $ (124,637.60) 0 $ (131,923.83) ARR 17.50% 16.45% 19.20% I recommend Project Bono because it has lowest loss in NPV and ARR 17.5% closest to 19.20%