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(b)
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.Project Kilo Project Lima Project Oscar Capital investment $167,400 $178,200 $212,550 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
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.) (Refer the below table)
Explanation / Answer
Project Kilo Interest rate NPV Year 0 -167400 15% -167,400 year 1 14040 15% 12,209 year 2 14040 15% 10,616 year 3 14040 15% 9,232 year 4 14040 15% 8,027 year 5 14040 15% 6,980 Total NPV -120,336 Project Lima Interest rate NPV Year 0 -178200 15% -178,200 year 1 18900 15% 16,435 year 2 17820 15% 13,474 year 3 16740 15% 11,007 year 4 12420 15% 7,101 year 5 9180 15% 4,564 Total NPV -125,619 Project Oscar Interest rate NPV Year 0 -212550 15% -212,550 year 1 29700 15% 25,826 year 2 24300 15% 18,374 year 3 23220 15% 15,268 year 4 14580 15% 8,336 year 5 13500 15% 6,712 Total NPV -138,034
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