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. Project Kilo Project Lima Project Oscar Capital investment $168,950 $179,850 $206,700 Annual net income: Year 1 14,170 19,075 29,975 2 14,170 17,985 24,525 3 14,170 16,895 23,435 4 14,170 12,535 14,715 5 14,170 9,265 13,625 Total $70,850 $75,755 $106,275 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.)

Explanation / Answer

Answer:

Project Kilo Project Lima Project Oscar Year Discount factor Cash inflow PV Cash inflow PV Cash inflow PV 1 0.86957 47960 41704.5772 55045 47865.48065 71315 62013.38455 2 0.75614 47960 36264.4744 53955 40797.5337 65865 49803.1611 3 0.65752 47960 31534.6592 52865 34759.7948 64775 42590.858 4 0.57175 47960 27421.13 48505 27732.73375 56055 32049.44625 5 0.49718 47960 23844.7528 45235 22489.9373 54965 27327.4987 Total 239800 160769.5936 255605 173645.4802 312975 213784.3486 Capital investment: 168950 179850 206700 NPV -8180.4064 -6204.5198 7084.3486

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