U3 Company is considering three long-term capital investment proposals. Each inv
ID: 2825577 • Letter: U
Question
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 $174,400 $190,750 $218,000 Annual net income: Year 1 15,260 19,620 29,430 2 15,260 18,530 25,070 3 15,260 17,440 22,890 4 15,260 13,080 14,170 5 15,260 9,810 13,080 Total $76,300 $78,480 $104,640 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.) Click here to view PV table. Compute the cash payback period for each project
Explanation / Answer
To calculate cash payback period, firstly calculate the cash flow from project that in this case = Net Income + Annual Depreciation Charge. Because depreciation is a non-cash expense.
Annual Depreciation on Project Bono = 174,400 / 5 = 34,880
Annual Depreciation on Project Edge = 190,750 / 5 = 38,150
Annual Depreciation on Project Clayton = 218,000 / 5 = 43,600
Answer-1:
Project Bono
Year
Net Income
Annual Depreciation
Cash Inflows
1
15260
34880
50140
2
15260
34880
50140
3
15260
34880
50140
4
15260
34880
50140
5
15260
34880
50140
Cash Payback Period = Total Investment / Annual Cash Inflow
= 174,400 / 50,140
= 3.478 years
Answer-2:
Project Edge
Year
Net Income
Annual Depreciation
Cash Inflows
Cumulative Cash Inflow
1
19620
38150
57770
57770
2
18530
38150
56680
114450
3
17440
38150
55590
170040
4
13080
38150
51230
221270
5
9810
38150
47960
269230
Cumulative cash flow shows that, total investment of $ 190,750 will be recovered in between 3 to 4 year, Cash Payback Period;
= 3 years + (190,750 – 170,040)/51,230
= 3 years + 20710 / 51230
= 3 years + 0.404 year
= 3.404 years.
Answer-3:
Project Clayton
Year
Net Income
Annual Depreciation
Cash Inflows
Cumulative Cash Inflow
1
29430
43600
73030
73030
2
25070
43600
68670
141700
3
22890
43600
66490
208190
4
14170
43600
57770
265960
5
13080
43600
56680
322640
Cumulative cash flow shows that, total investment of $ 218,000 will be recovered in between 3 to 4 year, Cash Payback Period;
= 3 years + (218,000 – 208,190)/57,770
= 3 years + 9,810 / 57,770
= 3 years + 0.169 year
= 3.169 years
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Project Bono
Year
Net Income
Annual Depreciation
Cash Inflows
1
15260
34880
50140
2
15260
34880
50140
3
15260
34880
50140
4
15260
34880
50140
5
15260
34880
50140
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