Problem 24-1A (Part Level Submission) (a) Open Show Work Problem 24-1A (Part Lev

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Problem 24-1A (Part Level Submission)

(a)

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Problem 24-1A (Part Level Submission)

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 $163,200 $178,500 $202,000 Annual net income: Year  1 14,280 18,360 27,540         2 14,280 17,340 23,460         3 14,280 16,320 21,420         4 14,280 12,240 13,260         5 14,280 9,180 12,240 Total $71,400 $73,440 $97,920
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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(a)

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

years Project Edge

years Project Clayton

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Explanation / Answer

Project Bono

Capital Investment = $163,200

Depreciation per year = $163,200 / 5 years

...................................= $32,640

Cash Flow per year = $32,640 + $14,280

................................= $46,920

Cash Payback Period = Capital Investment / Cash Flow per year

...................................= $163,200 / $46,920

...................................= 3.48 years

Project Edge

Capital Investment = $178,500

Depreciation per year = $178,500 / 5 years

...................................= $35,700

Payback Period = 3 years + [($178,500 - $159,120) / $47,940]

..........................= 3 years + 0.40 years

..........................= 3.4 years

Project Clayton

Capital Investment = $202,000

Depreciation per year = $202,000 / 5 years

...................................= $40,400

Payback Period = 3 years + [($202,000 - $193,620) / $53,660]

..........................= 3 years + 0.16 years

..........................= 3.16 years

Year Annual Net Income Depreciation Cash Inflow Cumulative Cash Flow 1 $18,360 $35,700 $54,060 $54,060 2 $17,340 $35,700 $53,040 $107,100 3 $16,320 $35,700 $52,020 $159,120 4 $12,240 $35,700 $47,940 $207,060 5 $9,180 $35,700 $44,880 $251,940

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