Problem 23-4A Sanchez Corporation is considering three long-term capital investm

Question

Problem 23-4A

Sanchez Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows.

Project

Brown

Red

Yellow

Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company’s minimum rate of return is the company’s cost of capital which is 12%.

(c)

Compute the net present value for each project. (Round PV factor to 5 decimal places, e.g. 1.25356 and final answer to 0 decimal places, e.g. 1,255.)

Net present value

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Project

Brown

Red

Yellow

Capital investment $189,010 $218,420 $248,620 Annual net income: Year 1 25,311 20,105 26,124 2 16,280 20,105 24,491 3 13,301 20,105 23,013 4 10,397 20,105 17,434 5 8,046 20,105 20,039 Total $ 73,335 $100,525 $111,101

Explanation / Answer

Answer:

Projects Brown Red Yellow Year Disscount Factor (12%) Net Annual cash flow PV Net Annual cash flow PV Net Annual cash flow PV 1 0.893 63113 56359.91 63,789 56963.58 75,848 67732.26 2 0.797 54,082 43103.35 63,789 50839.83 74,215 59149.36 3 0.712 51,103 36385.34 63,789 45417.77 72,737 51788.74 4 0.636 48,199 30654.56 63,789 40569.8 67,158 42712.49 5 0.5674 45,848 26014.16 63,789 36193.88 69,763 39583.53 Total 192517.3 229984.9 359721 260966.4 Capital investment 189010 218420 248620 Net present value 3507.318 11564.86 12346.38

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