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 cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)

Project Kilo Project Lima Project Oscar Capital Investment $159,650 $169,950 $212,550 Annual Net Income: Year 1 13,390 18,025 28,325 2 13,390 16,995 23,175 3 13,390 15,965 22,145 4 13,390 11,845 13,905 5 13,390 8,755 12,875 Total $66,950 $71,585 $100,425

Explanation / Answer

Project Kilo Project Lima Project Oscar Capital Investment $159,650 $169,950 $212,550 Year Annual Net Income Depriciation Cash flow Annual Net Income Depriciation Cash flow Commulative Cash Flow Annual Net Income Depriciation Cash flow Commulative Cash Flow A B A + B A B A + B A B A + B 0 -159650 -169950 -169950 -212,550 -212,550 1 13,390 31,930 45,320 18,025 33,990 52,015 -117,935 28,325 42,510 70,835 -141,715 2 13,390 31,930 45,320 16,995 33,990 50,985 -66,950 23,175 42,510 65,685 -76,030 3 13,390 31,930 45,320 15,965 33,990 49,955 -16,995 22,145 42,510 64,655 -11,375 4 13,390 31,930 45,320 11,845 33,990 45,835 28,840 13,905 42,510 56,415 45,040 5 13,390 31,930 45,320 8,755 33,990 42,745 71,585 12,875 42,510 55,385 100,425 Total $66,950 $159,650 $226,600 $71,585 $169,950 $241,535 $100,425 $212,550 $312,975 Depriciation Project Kilo = 159650 /5 = 31930 Project Lima = 169950/5 = 33990 Project Oscar = 212550/5 = 42510 Cash Payback period for even cash flows Project Kilo = Initial Investment / Annual Cash Flow                          = 159650 / 45320                          = 3.52 years Cash Payback period for uneven cash flows = A + B/C A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A Project Lima = 3 + 16995/ 45835                           = 3 + 0.37 years                            = 3.37 years Project Oscar = 3 + 11375 / 56415                           = 3 + 0.20 years                            = 3.20 years

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