Problem 26-5A (Part Level Submission) Henkel Company is considering three long-t

Question

Problem 26-5A (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 $150,600 Project Lima $165,400 Project Oscar $200,400 Capital investment Annual net income 17,770 16,940 16,190 12,210 9,114 $72,224 Year 1 13,979 13,979 13,979 13,979 13,979 $69,895 27,036 22,850 21,100 13,189 12,120 $96,295 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.) TABLE 1 Present Value of 1 Periods 4% 5% 6% 790 8% 9% 10% 11% 12% 15% 96154 95238 94340 0.93458 92593 91743 90909 90090 89286 86957 92456 90703 89000 0.87344 85734 84168 82645 .81162 79719 75614 88900 8638483962 0.81630 79383 77218 .75132 .73119 71178 65752 85480 82270 79209 0.76290 73503 70843 .68301 65873 63552 57175 59345 56743 49718 4 82193 78353 74726 0.7129968058 6499362092

Explanation / Answer

The Accounting rate of return is the rate where

PV of inflows - PV of outflows = 0

in case of Kilo

13979 PVIFA (r%,5) - 150600 = 0

so, r = -21%

Similarly

Lima = - -24%

Oscar = -23%

Kilo PV @ 15% Cash payback Lima PV @ 15% Cash payback Oscar PV @ 15% Cash payback Capital Investment -150600 -150600 -150600 -165400 -165400 -165400 -200400 -200400 -200400 1 13979 12155.65 -136621 17700 15391.30 -147700 27036 23509.57 -173364 2 13979 10570.13 -122642 16940 12809.07 -130760 22850 17277.88 -150514 3 13979 9191.42 -108663 16190 10645.19 -114570 21100 13873.59 -129414 4 13979 7992.54 -94684 12210 6981.11 -102360 13189 7540.85 -116225 5 13979 6950.03 -80705 9114 4531.27 -93246 12120 6025.78 -104105 -103740.22 -115042.06 -132172.32

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