Problem 26-5A (Part Level Submission) Henkel Company is considering three long-t
ID: 2483410 • Letter: P
Question
Problem 26-5A (Part Level Submission)
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
(c)
Compute the annual rate of return for each project. (Round answers to 1 decimal place, e.g. 23.7%.)
Annual rate of return
(d)
Rank the projects on each of the foregoing bases.
Project
Cash Payback
Net
Present Value
Annual
Rate of Return
Which project do you recommend?
Project Kilo
Project Lima
Project Oscar
Capital investment $149,800 $165,400 $200,500 Annual net income: Year 1 13,812 18,040 27,029 2 13,812 17,350 22,960 3 13,812 16,230 20,920 4 13,812 11,990 13,122 5 13,812 8,922 12,080 Total $69,060 $ 72,532 $96,111Explanation / Answer
Project kilo
Depreciation =$149800/5
=$29,960
Net cash flow=$29,960+$13,812
=$43,772
Year
cash flow
Net annual cash flow
Cummulative annual cash flow
PV factor
PV
0
-149800
-149800
1
13812
43772
43772
0.86957
38062.82
2
13812
43772
87544
0.75614
33097.76
3
13812
43772
131316
0.65752
28,780.97
4
13812
43772
175088
0.57175
25026.64
5
13812
43772
0.49718
21,762.56
13812
NPV=$146730.75-$149,800
=$-3069.25
Pay back period=3 years+(149800-131316)/43772
=3.42
Average annual net income=$13812
Annual Rate of Return=$13812{(149800-0)/2}
=18.44%
Project Lima
Depreciation =$165400/5
=$33080
Year
cash flow
Net annual cash flow
Cumulative
annual cash flow
PV factor
PV
0
-165400
-165400
1
18040
51120
51120
0.86957
44452.42
2
17350
50430
101550
0.75614
38132.14
3
16230
49310
150860
0.65752
32,422.31
4
11990
45070
195930
0.57175
25,768.77
5
8922
42002
0.49718
20,882.55
NPV=$ 161658.19 -$-165400
=-3741.81
Pay back period=3 years+(165400-150860)/45070
=3.32
Average annual net income=$14506.4
Annual Rate of Return=$14506.4{(165400-0)/2}
=17.54%
Project oscar
Depreciation =$200500/5
=$40100
Year
cash flow
Net annual cash flow
Cumulative annual cash flow
PV factor
PV
0
-200500
-200500
1
27029
67129
67129
0.86957
58373.36
2
22960
63060
130189
0.75614
47682.19
3
20920
61020
191209
0.65752
40,121.87
4
13122
53222
244431
0.57175
30,429.68
5
12080
52180
0.49718
25,942.85
NPV=$ 202549.95-$-200500
=2049.95
Pay back period=3 years+(200500-191209)/53222
=3.17
Average annual net income=$19222.2
Annual Rate of Return=$19222.2{(200500-0)/2}
=19.17%
Rank the projects on each of the foregoing bases.
Project
Cash Payback
Net
Present Value
Annual
Rate of Return
Kilo
3.42
$-3069.25
18.44%
Lima
3.32
$-3741.81
' v:shapes="_x0000_i1025"> 17.54%
Oscar
3.17
$2049.95
19.17%
Highest positive NPV is best - [largest negative number is worst]
Highest ARR is best
and if they want payback ranking, shortest payback period is best
So we should select project Oscar
Year
cash flow
Net annual cash flow
Cummulative annual cash flow
PV factor
PV
0
-149800
-149800
1
13812
43772
43772
0.86957
38062.82
2
13812
43772
87544
0.75614
33097.76
3
13812
43772
131316
0.65752
28,780.97
4
13812
43772
175088
0.57175
25026.64
5
13812
43772
0.49718
21,762.56
13812
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