Question

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

Instructions:

1. Compute the cash payback period for each project. (Round to two decimals.)
2. Compute the net present value for each project. (Round to nearest dollar.)
3. Compute the annual rate of return for each project. (Round to two decimals.)
4. Rank the projects on each of the foregoing bases. Which project do you recommend?

Answer 1