Problem 26-1A (Part Level Submission) U3 Company is considering three long-term

Question

Problem 26-1A (Part Level Submission) 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, Project Edge Project Bono $164,800 Project Clayton $208,000 Capital investment Annual net income: Year 1 $180,250 14,420 14,420 14,420 14,420 14,420 $72,100 18,540 17,510 16,480 12,360 9,270 $74,160 27,810 23,690 21,630 13,390 12,360 $98,880 4 Total 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.) (a) Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Bono Project Edge Project Clayton years years years

Explanation / Answer

a) Cash Payback Period =

Project Bono =

Total Cash flow = $ 72,100

Therefore, Average Cash flow/ year = $14,420

Cash Pay back period= $ 164,800/ 14,420

= 11.43 years

Rank 2

Project Edge =

Total Cash flow = $ 74,160

Therefore, Average Cash flow/ year = $14,832

Cash Pay back period= $ 180,250/ 14,832

= 12.15 years

Rank 3

Project Clayton =

Total Cash flow = $ 98,880

Therefore, Average Cash flow/ year = $19,776

Cash Pay back period= $ 208,000/ 19,776

= 10.52 years

Rank 1

(b) Net Present Value

Project Bono

Year Df Cash Flow ($) Present Value ($)

0 1 ( 164,800) ( 164,800)

1 0.869 14,420 12,530.98

2 0.756 14,420 10,901.52

3 0.657 14,420 9473.94

4 0.572 14,420 8248.24

5 0.497 14,420 7166.74

NPV (116478.58)

Rank 1

Project Edge

Year Df Cash Flow ($) Present Value ($)

0 1 ( 180,250) ( 180,250)

1 0.869 18,540 16111.26

2 0.756 17,510 13237.56

3 0.657 16,480 10827.36

4 0.572 12,360 7069.92   

5 0.497 9,270 4607.19

NPV (128396.71)

Rank 2

Project Clayton

Year Df Cash Flow ($) Present Value ($)

0 1 ( 208,000) ( 208,000)

1 0.869 27,810 24,166.84

2 0.756 23,690 17,909.64

3 0.657 21,630 14,210.91

4 0.572 13,390 7,659.08

5 0.497 12,360 6,142.92

NPV (137910.56)

Rank 3

(c) Annual rate of Return for the project = (Ending Value of Investment/ Beginning Value of Project)^1/5

Project Bono = (72,100/ 164,800)/5

= 8.75%

Rank 2

Project Edge = (74,160/ 180,250)/5

= 8.23%

Rank 3

Project Clayton = (98,880/ 208,000)/5

= 9.51%

Rank 1

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