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		$164,800		$180,250		$202,000
Annual net income:
Year  1		14,420		18,540		27,810
2		14,420		17,510		23,690
3		14,420		16,480		21,630
4		14,420		12,360		13,390
5		14,420		9,270		12,360
Total		$72,100		$74,160		$98,880

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 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		$-5975		$ -7531		$2887 (wrong)

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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		0.4375 % (wrong) %		0.4114 % (wrong) %		0.4847 % (wrong) %

Answer 1

Net present value
Depreciation = 164800/5 = 32960
project bono
year	cash inflow	pvf@15%	present value
1	47380	0.86957	41200
2	47380	0.75614	35825.9132
3	47380	0.65752	31153.2976
4	47380	0.57175	27089.515
5	47380	0.49718	23556.3884
	total		158825.1142
	investment		-164800
	net present value	-5974.8858
Project Edge
Depreciation = 180250/5 = 36050
year	cash inflow	pvf@15%	present value
1	54590	0.86957	47469.57
2	53560	0.75614	40498.86
3	52530	0.65752	34539.53
4	48410	0.57175	27678.42
5	45320	0.49718	22532.20
	total		172718.56
	investment		-180250
	net present value	-7531.44
project Clayton
depreciation = 202000/5 =40400
year	cash inflow	pvf@15%	present value
1	68210	0.86957	59313.04
2	64090	0.75614	48461.01
3	62030	0.65752	40785.97
4	53790	0.57175	30754.43
5	52760	0.49718	26231.22
	total		205545.67
	investment		-202000
	net present value	3545.67
Annual rate of return
project bono = 14420/(164800/2) = 17.5%
project edge = (74160/5)/(180250/2) = 16.46%
project clayton = (98880/5)/(202000/2) = 19.58%
Rank
project	cash payback	net present value	annual rate of return
Bono	3	2	2
Edge	2	3	3
Clayton	1	1	1
the best project is Clayton

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