Problem 26-1A U3 Company is considering three long-term capital investment propo

Question

Problem 26-1A 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.) Click here to view PV table. Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Bono years Project Edge years Project Clayton years 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 $ $ $ 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 % % % 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 Edge Clayton The best project is . Question Attempts: 0 of 3 used

Explanation / 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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