Problem 24-1A (part level submission) Henkel Company is considering three long-t
ID: 2491117 • Letter: P
Question
Problem 24-1A (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
Capital investment
$162,750
$173,250
$212,550
Annual net income:
Year
1
13,650
18,375
28,875
2
13,650
17,325
23,625
3
13,650
16,275
22,575
4
13,650
12,075
14,175
5
13,650
8,925
13,125
Total
$68,250
$72,975
$102,375
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 annual rate of return for each project. (Hint: Use average annual net income in your computation.) (Round answers to 2 decimal places, e.g. 10.50.)
Project Kilo
Project Lima
Project Oscar
Annual rate of return
%
%
%
Problem 24-1A (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
Capital investment
$162,750
$173,250
$212,550
Annual net income:
Year
1
13,650
18,375
28,875
2
13,650
17,325
23,625
3
13,650
16,275
22,575
4
13,650
12,075
14,175
5
13,650
8,925
13,125
Total
$68,250
$72,975
$102,375
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 annual rate of return for each project. (Hint: Use average annual net income in your computation.) (Round answers to 2 decimal places, e.g. 10.50.)
Project Kilo
Project Lima
Project Oscar
Annual rate of return
%
%
%
Please show how answer is achievedExplanation / Answer
Answer
Internal rate of return (IRR) is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
We have to find IRR by trial and error method by assuming different discount rates.
Project Kilo
Suppose discount rate is 12.936%
Year
Net income
Depreciation
Capital investment
Cashflow
Disc Rate : 12.936%
Present value
A
B
C
D
E
A+B+C
D*E
0
-162750
-162750
1.00
-162750.00
1
13650
32550
46200
0.89
40908.12
2
13650
32550
46200
0.78
36222.40
3
13650
32550
46200
0.69
32073.38
4
13650
32550
46200
0.61
28399.61
5
13650
32550
46200
0.54
25146.64
Net present value
0
Internal rate of return (IRR)
12.936%
Project Lima
Suppose discount rate is 13.4836%
Year
Net income
Depreciation
Capital investment
Cashflow
Disc Rate : 13.4836%
Present value
A
B
C
D
E
A+B+C
D*E
0
-173250
-173250
1
-173250.00
1
18375
34650
53025
0.8811846
46724.81
2
17325
34650
51975
0.7764863
40357.87
3
16275
34650
50925
0.6842278
34844.30
4
12075
34650
46725
0.602931
28171.95
5
8925
34650
43575
0.5312935
23151.11
Net present value
0.0
Internal rate of return (IRR)
13.4836%
Project Oscar
Suppose discount rate is 15.4981%
Year
Net income
Depreciation
Capital investment
Cash flow
Disc Rate : 15.4981%
Present value
A
B
C
D
E
A+B+C
D*E
0
-212550
-212550
1
-212550.00
1
28875
42510
71385
0.8658151
61806.21
2
23625
42510
66135
0.7496358
49577.16
3
22575
42510
65085
0.649046
42243.16
4
14175
42510
56685
0.5619538
31854.35
5
13125
42510
55635
0.4865481
27069.10
Net present value
0.0
Internal rate of return (IRR)
15.4981%
Year
Net income
Depreciation
Capital investment
Cashflow
Disc Rate : 12.936%
Present value
A
B
C
D
E
A+B+C
D*E
0
-162750
-162750
1.00
-162750.00
1
13650
32550
46200
0.89
40908.12
2
13650
32550
46200
0.78
36222.40
3
13650
32550
46200
0.69
32073.38
4
13650
32550
46200
0.61
28399.61
5
13650
32550
46200
0.54
25146.64
Net present value
0
Internal rate of return (IRR)
12.936%
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