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		$ 168,000		$ 183,750		$ 202,000
Annual net income:
Year  1		14,700		18,900		28,350
2		14,700		17,850		24,150
3		14,700		16,800		22,050
4		14,700		12,600		13,650
5		14,700		9,450		12,600
Total		$ 73,500		$ 75,600		$ 100,800

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. (Round answers to 2 decimal places, e.g. 10.50.)

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

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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		enter a percentage number rounded to 2 decimal places %		enter a percentage number rounded to 2 decimal places %		enter a percentage number rounded to 2 decimal places %

Answer 1

Depreciation:

(In $)

	Bono	Edge	Clayton
Capital investment	168,000	183,750	202,000
Useful life (Years)	5	5	5
Salvage value	0	0	0
Depreciation (investment/lifel	33,600	36,750	40,400

Cashflow = Annual net income + Depreciation

Cash flows are

(In $)

Years	Bono	Edge	Clayton
1	=14,700+33,600 =48,300	=18,900+36,750 =55,650	=28,350+40,400 =68,750
2	=14,700+33,600 =48,300	=17,850+36,750 =54,600	=24,150+40,400 =64,550
3	=14,700+33,600 =48,300	=16,800+36,750 =53,550	=22,050+40,400 =62,450
4	=14,700+33,600 =48,300	=12,600+36,750 =49,350	=13,650+40,400 =54,050
5	=14,700+33,600 =48,300	=9,450+36,750 =46,200	=12,600+40,400 =53,000

Cost of capital is 15%

PV factor is (1/1.15)ⁿ

^{Where "n" is no of years}

^{Discounted cashflows = PV factor * cashflows}

^{Discounted cash flows are}

^{(In $)}

Year	PV factor	Bono	Edge	Clayton
1	0.870	42,021	48,415.50	59,812.50
2	0.756	36,514.80	41,277.60	48,799.80
3	0.658	31,781.40	35,235.90	41,092.10
4	0.572	27,627.60	28,228.20	30,916.60
5	0.497	24,005.10	22,961.40	26,341
		161,949.9	176,118.60	206,962
Present value		161,950	176,119	206,962

Present value	161,950	176,119	206,962
Less: Capital investment	168,000	183,750	202,000
Net present value	(6,050)	(7,631)	4,962

Cash pay back period:

For project bono

= Initial investment / Annual Cashflow

= 168,000/48,300

= 3.48 years

For project Edge/ Clayton

(In $)

Years	cash flow of Project Edge	Cumulative cash flow of project Edge	Cash flow of Project Clayton	Cumulative cash flow of project Clayton
1	55,650	55,650	68,750	68,750
2	54,600	115,815	64,550	133,300
3	53,550	169,365	62,450	195,750
4	49,350	218,715	54,050	249,800
5	46,200	264,915	53,000	302,800

Edge = 2+(168,000-115,815)/53,550 = 2.97 years

Clayton = 3+(202,000-195,750)/54,060 = 3.12 years

Annual rate of return:

= Average income/Average Investment

= (Total income /5)/Investment

For bono

= (73,500/5)/168,000 = 8.75%

For edge

= (75,600/5)/183,750 = 8.23%

For Clayton

= (100,800/5)/202,000 = 9.98%