Question
In: Accounting
1. U3 Company is considering three long-term capital investment proposals. Each investment has a useful life...
1. 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.)
a. Compute the Cash payback period for each project.
Project Bono:
Project Edge:
Project Clayton:
b. Compute the net present value for each project. (Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45).)
Project Bono:
Project Edge:
Project Clayton:
c. Compute the annual rate of return for each project. (Round answers to 2 decimal places, e.g. 10.50. Hint: Use average annual net income in your computation.)
Project Bono:
Project Edge:
Project Clayton:
2.
Lon Timur is an accounting major at a midwestern state
university located approximately 60 miles from a major city. Many
of the students attending the university are from the metropolitan
area and visit their homes regularly on the weekends. Lon, an
entrepreneur at heart, realizes that few good commuting
alternatives are available for students doing weekend travel. He
believes that a weekend commuting service could be organized and
run profitably from several suburban and downtown shopping mall
locations. Lon has gathered the following investment
information.
| 1. | Five used vans would cost a total of $76,136 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation. | ||
| 2. | Ten drivers would have to be employed at a total payroll expense of $47,400. | ||
| 3. | Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $15,800, Maintenance $3,200, Repairs $3,700, Insurance $4,400, and Advertising $2,800. | ||
| 4. | Lon has visited several financial institutions to discuss funding. The best interest rate he has been able to negotiate is 15%. Use this rate for cost of capital. | ||
| 5. | Lon expects each van to make ten round trips weekly and carry an average of six students each trip. The service is expected to operate 30 weeks each year, and each student will be charged $12 for a round-trip ticket. |
Click here to view the factor table.
(a)
Determine the annual (1) net income and (2) net annual cash flows
for the commuter service. (Round answers to 0 decimal
places, e.g. 125.)
| Net income | $ | ||
| Net annual cash flows | $ |
(b)
Compute (1) the cash payback period and (2) the annual rate of
return. (Round answers to 2 decimal places, e.g.
10.50.)
| Cash payback period | years | ||
| Annual rate of return | % |
(c)
Compute the net present value of the commuter service.
(Round answer 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.)
| Net present value |
Solutions
Expert Solution
1.
Solution:
a.
Project Bono:
Payback period = Initial Investment / Annual Payback
Initial Investment = $168,000
Annula Cash Payback = Annual Income + Dep.
= 14,700 + 33,600
= $ 48,300
Cash Payback Period = 168,000/48,300
= 3.48 Years
WN 1: Calculation of Dep.
Dep. = 168,000/5= $33,600
Project Edge:
| Partiulars | Net Income | Dep. |
Cashflows (Net Income + Dep.) |
Cumulative Cashflow |
| Outflow | - | - | (183,750) | (183,750) |
| CF1 | 18,900 | 36750 | 55,650 | (128,100) |
| CF2 | 17,850 | 36750 | 54,600 | (73,500) |
| CF3 | 16,800 | 36750 | 53,550 | (19,950) |
| CF4 | 12,600 | 36750 | 49,350 | 29,400 |
| CF5 | 9,450 | 36750 | 46,200 | 75,600 |
Cash Payback Period = 3 + (19,950/49350)
= 3+0.404
= 3.404 Years
WN 1: Depreciation
Dep. = 183,750/5
= $36,750
Project Clayton
| Partiulars | Net Income | Dep. |
Cashflows (Net Income + Dep.) |
Cumulative Cashflow |
| Outflow | - | - | (202,000) | (202,000) |
| CF1 | 28,350 | 40400 | 68,750 | (133,250) |
| CF2 | 24,150 | 40400 | 64,550 | (68,700) |
| CF3 | 22,050 | 40400 | 62,450 | (6,250) |
| CF4 | 13,650 | 40400 | 54,050 | 47,800 |
| CF5 | 12,600 | 40400 | 53,000 | 100,800 |
Cash Payback Period = 3 + (6250/54,050)
= 3+0.115
= 3.12 years
WN 1: Depreciation
Dep. = 202,000/5 = $40,400
b.
Project Bono
| Partiulars | Net Income | Dep. |
Cashflows (Net Income + Dep.) |
PVF @ 15% | PV |
| Initital Cost | - | - | (168,000) | 1 | (168,000) |
| CF1 | 14,700 | 33,600 | 48,300 | 0.86957 | 42,000 |
| CF2 | 14,700 | 33,600 | 48,300 | 0.75614 | 36,522 |
| CF3 | 14,700 | 33,600 | 48,300 | 0.65752 | 31,758 |
| CF4 | 14,700 | 33,600 | 48,300 | 0.57175 | 27,616 |
| CF5 | 14,700 | 33,600 | 48,300 | 0.49718 | 24,014 |
| NPV | -6,091 |
Project Edge:
| Partiulars | Net Income | Dep. |
Cashflows (Net Income + Dep.) |
PVF @ 15% | PV |
| Outflow | - | - | (183,750) | 1 | (183,750) |
| CF1 | 18,900 | 36750 | 55,650 | 0.86957 | 48,391 |
| CF2 | 17,850 | 36750 | 54,600 | 0.75614 | 41,285 |
| CF3 | 16,800 | 36750 | 53,550 | 0.65752 | 35,210 |
| CF4 | 12,600 | 36750 | 49,350 | 0.57175 | 28,216 |
| CF5 | 9,450 | 36750 | 46,200 | 0.49718 | 22,970 |
| NPV | -7,678 |
Project Clayton:
| Partiulars | Net Income | Dep. |
Cashflows (Net Income + Dep.) |
PVF @ 15% | PV |
| Outflow | - | - | (202,000) | 1 | (202,000) |
| CF1 | 28,350 | 40,400 | 68,750 | 0.86957 | 59,783 |
| CF2 | 24,150 | 40,400 | 64,550 | 0.75614 | 48,809 |
| CF3 | 22,050 | 40,400 | 62,450 | 0.65752 | 41,062 |
| CF4 | 13,650 | 40,400 | 54,050 | 0.57175 | 30,903 |
| CF5 | 12,600 | 40,400 | 53,000 | 0.49718 | 26,350 |
| NPV | 4,907 |
c.
| Project Bono: | |||
| Average annual income = $14,700 | |||
| Cost = $168,000 | |||
| Annual rate of return = 14,700/168,000 *100 | |||
| = 8.75% | |||
| Project Edge: | |||
| Avg Annual Income=75,600/5 | |||
| = $ 15,120 | |||
| Annual rate of return = 15,120/183,750 *100 | |||
| = 8.23% | |||
| Project Clayton: | |||
| Avg Annual Income=100,800/5 | |||
| = $ 20,160 | |||
| Annual rate of return = 20,160/202,000 *100 | |||
 ekkarill92 answered 1 year agoRelated SolutionsU3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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
$ 204,000
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...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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. I got all the answers by my
computation for average rate of return Is wrong
Project
Bono
Project Edge
Project
Clayton
Capital
investment
$164,800
$180,250
$206,000
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...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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
$161,600
$176,750
$204,000
Annual net income:
Year 1
14,140
18,180
27,270
2
14,140
17,170
23,230
3
14,140
16,160
21,210
4
14,140
12,120
13,130
5
14,140
9,090
12,120
Total
$70,700
$72,720
$96,960
Depreciation is computed by the straight-line method with no
salvage value. The company’s cost of capital...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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
$163,200
$178,500
$204,000
Annual net income:
Year 1
14,280
18,360
27,540
2
14,280
17,340
23,460
3
14,280
16,320
21,420
4
14,280
12,240
13,260
5
14,280
9,180
12,240
Total
$71,400
$73,440
$97,920
Depreciation is computed by the straight-line method with no
salvage value. The company’s cost of capital...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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
$160,000
$175,000
$200,000
Annual net income:
Year 1
14,000
18,000
27,000
2
14,000
17,000
23,000
3
14,000
16,000
21,000
4
14,000
12,000
13,000
5
14,000
9,000
12,000
Total
$ 70,000
$ 72,000
$ 96,000
Depreciation is computed by the straight-line method with
no salvage value. The...
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...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
$172,800
$189,000
$206,000
Annual net income:
Year 1
15,120
19,440
29,160
2
15,120
18,360
24,840
3
15,120
17,280
22,680
4
15,120
12,960
14,040
5
15,120
9,720
12,960
Total
$75,600
$77,760
$103,680
Depreciation is computed by the straight-line method with no
salvage value. The company’s cost of capital...
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