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ID: 2473202 • Letter: L
Question
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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 $171,200 $187,250 $202,000 Annual net income: Year 1 14,980 19,260 28,890 2 14,980 18,190 24,610 3 14,980 17,120 22,470 4 14,980 12,840 13,910 5 14,980 9,630 12,840 Total $74,900 $77,040 $102,720
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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Explanation / Answer
Calculation of cash payback period:
Cash Payback period = Cost of investment/Cash Inflows
The project having low cash payback period will be ranked high
Calculation of net present value:
Net present value = Present value of Cash Inflows - Present value of Cash Outflows
Present value
The project having more net present value will be highly ranked.
Calculation of rate of return:
The project having high rate of return will be ranked high.
As the project Clayton is having high rate of return and low cash payback period. So it is the best project
Bono Edge Clayton Cost of investment 171200 187250 202000 Cash inflows 74900 77040 102720 Csh payback period 2.28 2.43 1.97 Ranking 2 3 1Related Questions
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