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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 is 15%. (Assume that cash flows occur evenly throughout the year.)

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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.

Solutions

Expert Solution

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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