Henkel Company is considering three long-term capital investment proposals. Each
ID: 2486645 • Letter: H
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.
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 net present value for each project. (Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45).)
Kilo $
Lima $
Oscar $
Compute the annual rate of return for each project. (Round answers to 2 decimal places, e.g. 10.50. Hint: Use average annual net income in your computation.)
Kilo %
Lima %
Oscar %
Project Kilo $162,750 Project Lima Project Oscar $214,500 Capital investment Annual net income: $173,250 Year 1 2 3 4 13,650 13,650 13,650 13,650 13,650 $68,250 18,375 17,325 16,275 12,075 8,925 $72,975 28,875 23,625 22,575 14,175 13,125 $102,375 TotalExplanation / Answer
As we know Net annual income we need to add depreciation for net inflow
Let us find out depreciation of each project
Dep p.a =Cost of asset- Salvage Value/ Life of Asset
Kilo:
= 162,750-0/5=32,250
Lima:
= 173,250-0/5=$34,650
Oscar:
=214,500-0/5=42,900
Now let us add Depreciation to Net cashflow to get Annual Cashflow
Kilo
Year
Net CashFlow
Deprecation
Annual Cashflow
1
13,650
32,550
46,200
2
13,650
32,550
46,200
3
13,650
32,550
46,200
4
13,650
32,550
46,200
5
13,650
32,550
46,200
Lima
Year
Net CashFlow
Deprecation
Annual Cashflow
1
18,375
34,650
53,025
2
17,325
34,650
51,975
3
16,275
34,650
50,925
4
12,075
34,650
46,725
5
8,925
34,650
43,575
oscar
Year
Net CashFlow
Deprecation
Annual Cashflow
1
28,875
42,900
71,775
2
23,625
42,900
66,525
3
22,575
42,900
65,475
4
14,175
42,900
57,075
5
13,125
42,900
56,025
Kilo
Year
CashFlow
Cum Cash Flow
-
(162,750)
(162,750)
1
46,200
(116,550)
2
46,200
(70,350)
3
46,200
(24,150)
4
46,200
22,050
5
46,200
68,250
Payback Period = 3+ 24,150/46,200
= 3 +0.52
=3.52 years
Lima
Year
CashFlow
Cum Cash Flow
-
(173,250)
(173,250)
1
53,025
(120,225)
2
51,975
(68,250)
3
50,925
(17,325)
4
46,725
29,400
5
43,575
72,975
Payback Period = 3+ 17,325/46,725
= 3 +0.37
=3.37years
Oscar
Year
CashFlow
Cum Cash Flow
-
(214,500)
(214,500)
1
71,775
(142,725)
2
66,525
(76,200)
3
65,475
(10,725)
4
57,075
46,350
5
56,025
102,375
Payback Period = 3+ 10,725/57,075
= 3 +0.19
=3.19years
b)
Kilo
Year
CashFlow
PV Factor@ 15%
PV
-
(162,750)
1.0000
(162,750.0)
1
46,200
0.8696
40,173.9
2
46,200
0.7561
34,933.8
3
46,200
0.6575
30,377.2
4
46,200
0.5718
26,415.0
5
46,200
0.4972
22,969.6
NPV
(7,880.4)
Lima
Year
CashFlow
PV Factor@ 15%
PV
-
(173,250)
1.0000
(173,250.0)
1
53,025
0.8696
46,108.7
2
51,975
0.7561
39,300.6
3
50,925
0.6575
33,484.0
4
46,725
0.5718
26,715.2
5
43,575
0.4972
21,664.5
NPV
(5,977.1)
Oscar
Year
CashFlow
PV Factor@ 15%
PV
-
(214,500)
1.0000
(214,500.0)
1
71,775
0.8696
62,413.0
2
66,525
0.7561
50,302.5
3
65,475
0.6575
43,050.9
4
57,075
0.5718
32,632.8
5
56,025
0.4972
27,854.3
NPV
1,753.5
c) Annual return:
Kilo :
Average return=68,250/5=13,650
Average investment= $162,750+ 0/2=81,375
Annual Return= Average Return/ Average Investment= 13,650/81,375=16.77%
Lima:
Average return=$72,975/5=$14,595
Average investment= $173,250+ 0/2=$86,625
Annual Return= Average Return/ Average Investment= 14,595/86,625=16.85%
Oscar:
Average return=$102,375/5=$20,475
Average investment= $214,500+ 0/2=$107,250
Annual Return= Average Return/ Average Investment
=20,475/107,250=19.09%
Kilo
Year
Net CashFlow
Deprecation
Annual Cashflow
1
13,650
32,550
46,200
2
13,650
32,550
46,200
3
13,650
32,550
46,200
4
13,650
32,550
46,200
5
13,650
32,550
46,200
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