Henkel Company is considering three long-term capital investment proposals. Each
ID: 2491211 • 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 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.)
Annual rate of return%
Explanation / Answer
CALCULATION OF CASH FLOWDURING THE LIFE OF PROJECT Project Kilo Project Lima Project Oscar YR Net Income Cash Inflow = NI+Dep Net Income Cash Inflow = NI+Dep Net Income Cash Inflow = NI+Dep 1 13,780 46,640 18,550 53,530 29,150 71270 2 13,780 46,640 17,490 52,470 23,850 65970 3 13,780 46,640 16,430 51,410 22,790 64910 4 13,780 46,640 12,190 47,170 14,310 56430 5 13,780 46,640 9,010 43,990 13,250 55370 $68,900 $73,670 $103,350 145470 NPV @15% Project Kilo Project Lima Project Oscar PARTIculars PVF of 15% Amount PV Amount PV Amount PV 0 Capital investment 1 (164,300.00) (164,300.00) (174,900.00) (174,900.00) (210,600.00) (210,600.00) 1 Annual Net Income 0.8696 46,640.00 40,556.52 53,530.00 46,547.83 71,270.00 61,973.91 2 Annual Net Income 0.7561 46,640.00 35,266.54 52,470.00 39,674.86 65,970.00 49,882.80 3 Annual Net Income 0.6575 46,640.00 30,666.56 51,410.00 33,802.91 64,910.00 42,679.38 4 Annual Net Income 0.5718 46,640.00 26,666.57 47,170.00 26,969.60 56,430.00 32,264.04 5 Annual Net Income 0.4972 46,640.00 23,188.32 43,990.00 21,870.80 55,370.00 27,528.68 Total 68,900.00 (7,955.49) 73,670.00 (6,034.00) 103,350.00 3,728.80 NPV @13% Project Kilo Project Lima Project Oscar PARTIculars PVF of 12% Amount PV Amount PV Amount PV 0 Capital investment 1 (164,300.00) (164,300.00) (174,900.00) (174,900.00) (210,600.00) (210,600.00) 1 Annual Net Income 0.8929 46,640.00 41,642.86 53,530.00 47,794.64 71,270.00 63,633.93 2 Annual Net Income 0.7972 46,640.00 37,181.12 52,470.00 41,828.76 65,970.00 52,590.88 3 Annual Net Income 0.7118 46,640.00 33,197.43 51,410.00 36,592.62 64,910.00 46,201.66 4 Annual Net Income 0.6355 46,640.00 29,640.56 47,170.00 29,977.39 56,430.00 35,862.29 5 Annual Net Income 0.5674 46,640.00 26,464.79 43,990.00 24,961.11 55,370.00 31,418.43 Total 68,900.00 3,826.76 73,670.00 6,254.52 103,350.00 19,107.17 NPV @16% Project Kilo Project Lima Project Oscar PARTIculars PVF of 16% Amount PV Amount PV Amount PV 0 Capital investment 1 (164,300.00) (164,300.00) (174,900.00) (174,900.00) (210,600.00) (210,600.00) 1 Annual Net Income 0.8621 46,640.00 40,206.90 53,530.00 46,146.55 71,270.00 61,439.66 2 Annual Net Income 0.7432 46,640.00 34,661.12 52,470.00 38,993.76 65,970.00 49,026.46 3 Annual Net Income 0.6407 46,640.00 29,880.27 51,410.00 32,936.21 64,910.00 41,585.09 4 Annual Net Income 0.5523 46,640.00 25,758.86 47,170.00 26,051.57 56,430.00 31,165.79 5 Annual Net Income 0.4761 46,640.00 22,205.91 43,990.00 20,944.21 55,370.00 26,362.38 Total 68,900.00 (11,586.94) 73,670.00 (9,827.70) 103,350.00 (1,020.63) STATEMENT SHOWING IRR Project Kilo Project Lima Project Oscar Rate NPV Rate NPV Rate NPV 15% (7,955.49) 15% (6,034.00) 15% 3,728.801 12% 3,826.76 12% 6,254.52 16% (1,020.63) IRR = 12% + 3826.76/(7955.49 -3826.76) IRR = 12% +6254.52/(6034+6254.52) IRR = 15% +3728.801/(3728.801+1020.63) 12.93 12.5089726 15.79
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