In: Accounting
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 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 |
eTextbook and Media
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 |
eTextbook and Media
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 % |
eTextbook and Media
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 rank of the project 132 | select a rank of the project 231 | select a rank of the project 321 | ||||
Edge | select a rank of the project 132 | select a rank of the project 123 | select a rank of the project 123 | ||||
Clayton | select a rank of the project 132 | select a rank of the project 123 | select a rank of the project 123 |
The best project is select the best project BonoEdgeClayton. |
Calculation of payback period | ||||
depreciation = 163200/5 = 32640 | ||||
project bono | ||||
payback period = capital investment/cash inflow | ||||
payback period = 163200/(14280+32640) = 3.48 years | ||||
Project Edge | ||||
depreciation = 178500/5 = 35700 | ||||
Years | annual net income (a) | depreciation(b) | cash flow(a)+(b) | cumulative cash flow |
1 | 18360 | 35700 | 54060 | 54060 |
2 | 17340 | 35700 | 53040 | 107100 |
3 | 16320 | 35700 | 52020 | 159120 |
4 | 12240 | 35700 | 47940 | 207060 |
5 | 9180 | 35700 | 44880 | 251940 |
payback period = (178500-159120)/(207060-159120) = 0.40 | ||||
payback period = 3+0.40 = 3.40years | ||||
project Clayton | ||||
depreciation = 204000/5 = 40800 | ||||
Years | annual net income (a) | depreciation(b) | cash flow(a)+(b) | cumulative cash flow |
1 | 27540 | 40800 | 68340 | 68340 |
2 | 23460 | 40800 | 64260 | 132600 |
3 | 21420 | 40800 | 62220 | 194820 |
4 | 13260 | 40800 | 54060 | 248880 |
5 | 12240 | 40800 | 53040 | 301920 |
payback period = (204000-194820)/(248880-194820) = 0.17 | ||||
payback period = 3years+0.16 = 3.17years | ||||
Net present value | ||||
project bono | ||||
year | cash inflow | pvf@15% | present value | |
1 | 46920 | 0.86957 | 40800 | |
2 | 46920 | 0.75614 | 35478.0888 | |
3 | 46920 | 0.65752 | 30850.8384 | |
4 | 46920 | 0.57175 | 26826.51 | |
5 | 46920 | 0.49718 | 23327.6856 | |
total | 157283.1228 | |||
investment | -163200 | |||
net present value | -5916.8772 | |||
Project Edge | ||||
year | cash inflow | pvf@15% | present value | |
1 | 54060 | 0.86957 | 47008.70 | |
2 | 53040 | 0.75614 | 40105.67 | |
3 | 52020 | 0.65752 | 34204.19 | |
4 | 47940 | 0.57175 | 27409.70 | |
5 | 44880 | 0.49718 | 22313.44 | |
total | 171041.69 | |||
investment | -178500 | |||
net present value | -7458.31 | |||
project Clayton | ||||
year | cash inflow | pvf@15% | present value | |
1 | 68340 | 0.86957 | 59426.09 | |
2 | 64260 | 0.75614 | 48589.56 | |
3 | 62220 | 0.65752 | 40910.89 | |
4 | 54060 | 0.57175 | 30908.81 | |
5 | 53040 | 0.49718 | 26370.43 | |
total | 206205.77 | |||
investment | -204000 | |||
net present value | 2205.77 | |||
Annual rate of return = average net profit/average investment | ||||
project bono = 14280/(163200/2) = 17.5% | ||||
project edge = (73440/5)/(178500/2) = 16.46% | ||||
project clayton = (97920/5)/(204000/2) = 19.20% | ||||
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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