U3 Company is considering three long-term capital investment proposals. Each inv
ID: 2477588 • Letter: U
Question
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. 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:) Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) 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.) Compute the annual rate of return for each project.(Round answer to 2 decimal places, e.g. 10.50.) Rank the projects on each of the foregoing bases. Which project do you recommend?Explanation / Answer
Payback for BONO
= $171200 / $49220 per year = 3.48 years
Pay back for EDGE
= 3 + (187250 - 166920) / 50290 = 3.40 years
Pat back period for CLAYTON
= 3 + (206000 - 199570) / 55110 = 3.12 years
Annual rate of return = Average net profit / Average investment
There is no salvage value for the investment made by all of the projects.
ARR for BONO
= 14980 / [(171200+0)/2] = 17.50%
ARR for EDGE
Average net income = $77040/5 = $15408
ARR = $15408 / [(187250+0)/2] = 16.46%
ARR for CLAYTON
Average income = $102720/5 = $20544 per year
ARR = $20544 / [(206000+0)/2] = 19.95%
NPV of project BONO = ($6165.34)
NPV of project EDGE = ($7776.76)
NPV of project CLAYTON = $5006.32
Dependiong upon the above analysis, Clayton is the best project .
Particulars Project bono project edge project clayton Annual Net income depreciation Net cash flow Cumulative cash flow PV factor @15% PV of cash flows Annual Net income depreciation Net cash flow Cumulative cash flow PV factor @15% PV of cash flows Annual Net income depreciation Net cash flow Cumulative cash flow PV factor @15% PV of cash flows Capital Investment -171200 -187250 -206000 1 14980 34240 49220 49220 0.87 42821.4 19260 37450 56710 56710 0.87 49337.7 28890 41200 70090 70090 0.87 60978.3 2 14980 34240 49220 98440 0.756 37210.32 18190 37450 55640 112350 0.756 42063.84 24610 41200 65810 135900 0.756 49752.36 3 14980 34240 49220 147660 0.658 32386.76 17120 37450 54570 166920 0.658 35907.06 22470 41200 63670 199570 0.658 41894.86 4 14980 34240 49220 196880 0.572 28153.84 12840 37450 50290 217210 0.572 28765.88 13910 41200 55110 254680 0.572 31522.92 5 14980 34240 49220 246100 0.497 24462.34 9630 37450 47080 264290 0.497 23398.76 12840 41200 54040 308720 0.497 26857.88 Total & NPV 74900 246100 -6165 77040 264290 -7777 102720 308720 5006Related Questions
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