Amazon Corporation is considering two long-term capital investment proposals. Re
ID: 2801852 • Letter: A
Question
Amazon Corporation is considering two long-term capital investment proposals. Relevant data on each project are as follows.
Project Milo
Project Otis
Capital investment
$175,000
$190,000
Annual net cash flows:
Year
1
47,500
57,000
2
47,000
54,000
3
46,000
52,000
4
43,000
47,000
5
41,000
46,000
Total
$ 224.500
$256,000
Other information: The company’s minimum rate of return is the company’s cost of capital which is 12%. Assume cash flows occur evenly throughout the year. Depreciation is computed by the straight-line method with no salvage value.
Instructions:
Compute the following and rank the projects for each category:
Compute the cash payback period for each project. (Round your answers to 2 decimal places.)
Compute the net present value for each project. Use the appropriate tables from Appendix G. (Round your answers to 0 decimal places.)
Rank the projects on each of the foregoing bases. Which project do you recommend?
Project Milo
Project Otis
Capital investment
$175,000
$190,000
Annual net cash flows:
Year
1
47,500
57,000
2
47,000
54,000
3
46,000
52,000
4
43,000
47,000
5
41,000
46,000
Total
$ 224.500
$256,000
Explanation / Answer
Milo:
Depreciation = $175000 / 5 years
= $35000
Otis:
Depreciation = $190000 / 5 years
= $38000
a. Cash payback period:
Payback period:
Milo = 2 + $10500 / $81000
= 2.13 years
Otis = 2 + $3000 / $90000
= 2.03 years
Net present value:
Milo Otis
Cash payback period 2.13 2.03
Net present value $114398 $133927.
Year Milo (Cash flows) Cummulative cash flows Otis (Cash flows) Cummulative cash flows 1 $82500 $82500 $95000 $95000 2 $82000 $164500 $92000 $187000 3 $81000 $245500 $90000 $277000 4 $78000 $323500 $85000 $362000 5 $76000 $399500 $84000 $446000Related Questions
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