Henkel Company is considering three long-term capital investment proposals. Each

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.)

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 Capital investment $164,300 $174,900 $210,600 Annual net income:     Year 1 13,780 18,550 29,150 2 13,780 17,490 23,850 3 13,780 16,430 22,790 4 13,780 12,190 14,310 5 13,780 9,010 13,250 Total $68,900 $73,670 $103,350

Explanation / Answer

Calculation of annual rate of return for each project:

Project Kilo

Project Lima

Project Oscar

Capital investment (A)

$     164,300

$        174,900

$        210,600

Average Annual net income (B)

$        13,780

$          14,734

$          20,670

(Total Net income / Number of years)

(68900 / 5)

(73670/5)

(103350/5)

Annual rate of return for each project

8.39%

8.42%

9.81%

Calculation of annual rate of return for each project:

Project Kilo

Project Lima

Project Oscar

Capital investment (A)

$     164,300

$        174,900

$        210,600

Average Annual net income (B)

$        13,780

$          14,734

$          20,670

(Total Net income / Number of years)

(68900 / 5)

(73670/5)

(103350/5)

Annual rate of return for each project

8.39%

8.42%

9.81%

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