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		$ 171,200		$ 187,250		$ 202,000
Annual net income:
Year  1		14,980		19,260		28,890
2		14,980		18,190		24,610
3		14,980		17,120		22,470
4		14,980		12,840		13,910
5		14,980		9,630		12,840
Total		$ 74,900		$ 77,040		$ 102,720

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

Project Bono		enter the cash payback period in years rounded to 2 decimal places	years
Project Edge		enter the cash payback period in years rounded to 2 decimal places	years
Project Clayton		enter the cash payback period in years rounded to 2 decimal places	years

Compute the net present value for each project. (Round answers to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

		Project Bono		Project Edge		Project Clayton
Net present value		$ enter a dollar amount rounded to 0 decimal places		$ enter a dollar amount rounded to 0 decimal places		$ enter a dollar amount rounded to 0 decimal places

Compute the annual rate of return for each project. (Hint: Use average annual net income in your computation.) (Round answers to 2 decimal places, e.g. 10.50%.)

		Project Bono		Project Edge		Project Clayton
Annual rate of return		enter percentages rounded to 2 decimal places %		enter percentages rounded to 2 decimal places %		enter percentages rounded to 2 decimal places %

Rank the projects on each of the foregoing bases. Which project do you recommend?

Project		Cash Payback		Net Present Value		Annual Rate of Return
Bono		select a ranking numberselect a ranking number  1 3  2		select a ranking numberselect a ranking number   2  3 1		select a ranking numberselect a ranking number   3  2 1
Edge		select a ranking numberselect a ranking number  1 3  2		select a ranking numberselect a ranking number  1 2  3		select a ranking numberselect a ranking number  1 2  3
Clayton		select a ranking numberselect a ranking number  1 3  2		select a ranking numberselect a ranking number  1 2  3		select a ranking numberselect a ranking number  1 2  3

The best project is select a projectselect a project  Bono/Edge/Clayton.

Answer 1

Calculation of cash payback period:
Cash Payback period = Cost of investment/Cash Inflows
	Bono	Edge	Clayton
Cost of investment	171200	187250	202000
Cash inflows	74900	77040	102720
Csh payback period	2.28	2.43	1.97
Ranking	2	3	1
The project having low cash payback period will be ranked high
Calculation of net present value:
Net present value = Present value of Cash Inflows - Present value of Cash Outflows
		Bono		Edge		Clayton
Particulars	Discounting Factor @15%	Amt.	Present value	Amt	Present Valu	Amt.	Present Value
Cash Outflow at T =0	1	171200	-171200	187250	-187250	202000	-202000
Cash inflows at t=1	0.86956	14980	13026	19260	16747.72	28890	25121.59
	0.75614	14980	11326.98	18190	13754.19	24610	18608.6
	0.65752	14980	9849.65	17120	11256.74	22470	14774.47
	0.57175	14980	8564.82	12840	7341.27	13910	7953.04
	0.49718	14980	7447.76	9630	4787.84	12840	6383.79
Net Present Value			-120984.79		-133362.24		-129158.51
			or (120985)		or (133362)		-129158
Ranking			1		3		2
The project having more net present value will be highly ranked.
Calculation of rate of return:
	Brun	Edge	Clayton
Total Income	74900	77040	102720
Average income (Toatl income/5)	14980	15408	20544
Cost of investment	171200	187250	202000
Rate of return (Average return/Cost of investment)*100	8.75%	8.23%	10.17%
Ranking	2	3	1
The project having high rate of return will be ranked high.
As the project Clayton is having high rate of return and low cash payback period. So it is the best project