Question

4. Relaxation Resorts Inc. is a large company that is considering three long-term capital investments. Each investment has a useful life of five (5) years. Consider the profit for the following three alternative investment options:

	Discount Factor	Project A	Project B	Project C
Capital Investment		$175,000	$195,000	$205,000
Annual Profit:
Year 1	0.86957	$15,500	$21,000	$25,000
Year 2	0.75614	15,500	19,500	23,000
Year 3	0.65752	15,500	17,000	20,500
Year 4	0.57175	15,500	15,500	17,000
Year 5	0.49718	15,500	13,000	14,500
Total		$77,500	$86,000	$100,000

The discount factor for a five-year annuity at 15% is 3.35216.

Depreciation is calculated using the straight-line method with no residual/salvage value. The company’s cost of capital is 15%.

Required:

1. Calculate the following for each option:

1. Payback period
2. Average accounting rate of return
3. Net present value

2. Explain which project Relaxation Resorts Inc. should accept.

Answer 1