(a) Open Show Work (b) U3 Company is considering three long-term capital investm

Question

(a)

Open Show Work

(b)

U3 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 Bono Project Edge Project Clayton Capital investment $172,800 $189,000 $206,000 Annual net income: Year  1 15,120 19,440 29,160         2 15,120 18,360 24,840         3 15,120 17,280 22,680         4 15,120 12,960 14,040         5 15,120 9,720 12,960 Total $75,600 $77,760 $103,680
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.)

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Explanation / Answer

Project edge

3 + (189000-168480)/50760 = 3.40 years

Project clayton

3 + (206000-200280)/55240 = 3.10 years

(b)

Net present value

Bono

Cash flows = 49680

PV Factor for 5 years = 3.3522

(49680*3.3522)-172800 = -6263

Edge

NPV = 181151-189000 = -7849

Clayton

NPV = 211687-206000 = 5687

Particulars Bono Invstment Net income 15120 Add Depreciation 34560 Cash Flows 49680 Cash Payback Period = Initial investment/Net Periodic cash flow 172800/49680 = 3.48 years

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