Henkel Company is considering three long-term capital investment proposals. Each

Question

Henkel 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.

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.)

Project Kilo Project Lima Project Oscar Capital investment $167,400 $178,200 $214,500 Annual net income:     Year 1 14,040 18,900 29,700 2 14,040 17,820 24,300 3 14,040 16,740 23,220 4 14,040 12,420 14,580 5 14,040 9,180 13,500 Total $70,200 $75,060 $105,300

Explanation / Answer

1. Project Kilo : Initial investment is $ 167,400

Therefore annual depreciation is $ 33,480.

Annual cash flows = $ (14040 + 33,480) = $ 47,520

Cash payback period is 167,400 / 47,520 = 3.52 years

Net present value is 47,520 x 3.35216 = $ 159, 295 - 167,400 = $ ( 8,105)

Annual rate of return is 14040/ 167,400 =8.39%

Project Lima:

Net present value is $ (6148)

Cash payback period is 3.37 years

Annual rate of return = average return / initial investment = 15,012 /178, 200 x 100 = 8.42%

Project oscar to be done the same way as project lima.

Period Initial investment Annual net income Depreciation Annual cash flows Cumulative cash flows PV factor at 15% Present value 0 178,200 1 (178,200) 1 18,900 35,640 54,540 54,540 0.86957 47,426 2 17,820 35,640 53,460 108,000 0.75614 40,423 3 16,740 35,640 52,380 160,380 0.65752 34,441 4 12,420 35,640 48,060 208,440 0.57175 27,478 5 9,180 35,640 44,820 0.49718 22,284

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