Question

Swifty 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 value. The company’s cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.)

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		$		$		$

Answer 1

NET PRESENT VALUE

Net Present Value = Discounted Cash Inflow - Discounted Cash Outflow

PROJECT BONO

Year	Computation	Cash Flow	PVF @ 15%	Discounted Cash flow
1-5	($14,420+$32,960)	$47,380	3.35216	$158,825
0		($164,800)	1	($164,800)
			Net Present Value	($5,975)

Depreciation Expense = $164,800 / 5 years = $32,960

PROJECT EDGE

Year	Computation	Cash Flow	PVF @ 15%	Discounted Cash flow
1	($18,540+$36,050)	$54,590	0.86957	$47,470
2	($17,510+$36,050)	$53,560	0.75614	$40,499
3	($16,480+$36,050)	$52,530	0.65752	$34,540
4	($12,360+$36,050)	$48,410	0.57175	$27,678
5	($9,270+$36,050)	$45,320	0.49718	$22,532
0		($180,250)	1	($180,250)
			Net Present Value	($7,531)

Depreciation Expense = $180,250 / 5 years = $36,050

PROJECT CLAYTON

Year	Computation	Cash Flow	PVF @ 15%	Discounted Cash flow
1	($27,810+$40,800)	$68,610	0.86957	$59,661
2	($23,690+$40,800)	$64,490	0.75614	$48,764
3	($21,630+$40,800)	$62,430	0.65752	$41,049
4	($13,390+$40,800)	$54,190	0.57175	$30,983
5	($12,360+$40,800)	$53,160	0.49718	$26,430
0		($204,000)	1	($204,000)
			Net Present Value	$2,887

Depreciation Expense = $204,000 / 5 years = $40,800

All the best...