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.

B)Compute the net present value for each project. (Round answers to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round Discount Factor to 5 decimal places.)

C) 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.)

D) Rank the projects on each of the foregoing bases. Which project do you recommend?

Project Kilo $162,750 Project Lima Project Oscar $214,500 Capital investment $173,2510 Annual net income: Year 1 2 13,650 13,650 13,650 13,650 13,650 $68,250 18,375 17,325 16,275 12,075 8,925 $72,975 28,875 23,625 22,575 14,175 13,125 $102,37.5 4 Total

Explanation / Answer

NPV = ($7880.21)

Payback period:

The payback period will be in between 3rd and 4 th year.

Payback period

= 3 + [(162750 - 138600) / (184800-138600)]

= 3 + 0.52

= 3.52 years

Annual Rate of return :

Average annual net income = $13650

Annual rate of return

= Average net income / average investment

= $13250 / $162750 = 8.14%

NPV = ($5976.83)

Payback period:

The payback period will be in between 3rd and 4 th year.

Payback period

= 3 years + [(173250 - 155925) / (202650 - 155925)]

= 3 .37 years

Annual Rate of return :

Average annual net income = $72975 / 5 = $14595

Annual rate of return

= Average net income / average investment

= $14595 / $173250 = 8.42%

NPV = $1753.86

Payback period:

The payback period will be in between 3rd and 4 th year.

Payback period

= 3 years + [(214500 - 203775) / (260850 - 203775)]

= 3.19 years

Annual Rate of return :

Average annual net income = $102375 / 5 = $20475

Annual rate of return

= Average net income / average investment

= $20475 / $214500 = 9.55 %

Project KILO Year 0 1 2 3 4 5 total investment -162750 -162750 Annual net income 13650 13650 13650 13650 13650 68250 Add Depreciation 32550 32550 32550 32550 32550 Net cash inflow 46200 46200 46200 46200 46200 231000 Cumulative cash inflow 46200 92400 138600 184800 231000 PV factor @15% 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 4.35216 pv of cash flow -162750 40174.134 34933.668 30377.424 26414.85 22969.716 -7880.208

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