I linked a URL to the picture http://postimg.org/image/dscs93o3l/ U3 Company is
ID: 2484248 • Letter: I
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I linked a URL to the picture
http://postimg.org/image/dscs93o3l/
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. Rank the projects on each of the foregoing bases. Which project do you recommend?Explanation / Answer
Project Evaluation Project Bono Details Year PV Factor @15% Investment Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0 1 (171,200) (171,200) (171,200) Year 1 0.870 14,980 34,240 49,220 42,800 Year 2 0.756 14,980 34,240 49,220 37,217 Year 3 0.658 14,980 34,240 49,220 32,363 Year 4 0.572 14,980 34,240 49,220 28,142 Year 5 0.497 14,980 34,240 49,220 24,471 Total (6,206.93) Cash Payback period= 3.48 years NPV = $ (6,206.93) Annual Net Income 14,980 Investment 171,200 Annual rate of return=Annual Net Income/Investment 8.75% Project Edge Details Year PV Factor @15% Investment Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0 1 (187,250) (187,250) (187,250) Year 1 0.870 19,260 37,450 56,710 49,313 Year 2 0.756 18,190 37,450 55,640 42,072 Year 3 0.658 17,120 37,450 54,570 35,881 Year 4 0.572 12,840 37,450 50,290 28,753 Year 5 0.497 9,630 37,450 47,080 23,407 Total 77,040 (7,823.91) Cash Payback period= 3.40 years NPV = $ (7,823.91) Annual Avg Net Income 15,408 Investment 187,250 Annual rate of return=Annual Net Income/Investment 8.23% Project Clayton Details Year PV Factor @15% Investment Annual Net Income Add Back Depreciation Net Cash flow PV of Cash flows Year 0 1 (206,000) (206,000) (206,000) Year 1 0.870 28,890 41,200 70,090 60,948 Year 2 0.756 24,610 41,200 65,810 49,762 Year 3 0.658 22,470 41,200 63,670 41,864 Year 4 0.572 13,910 41,200 55,110 31,509 Year 5 0.497 12,840 41,200 54,040 26,867 Total 102,720 4,950.45 Cash Payback period= 3.12 years NPV = $ 4,950.45 Annual Avg Net Income 20,544 Investment 206,000 Annual rate of return=Annual Net Income/Investment 9.97% Ranking Payback NPV ARR Bono 3.00 2 2 Edge 2.00 3 3 Clayton 1.00 1 1 Recommended project is Cayton as this project only has positive NPV
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