Question

Problem 25-01A a-d (Video) (Part Level Submission) 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.) Click here to view PV table.

(a) Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Bono years Project Edge years Project Clayton years

Answer 1

Answer:

a) Calculation of cash payback period for each period:

Particulars

Project Bono

Project Edge

Project Clayton

	Inflow	Cumulative Inflow	Inflow	Cumulative Inflow	Inflow	Cumulative Inflow
Net Income for Year -1	$14,000	$14,000	$18,000	$18,000	$27,000	$27,000
Net Income for Year -2	$14,000	$28,000	$17,000	$35,000	$23,000	$50,000
Net Income for Year -3	$14,000	$42,000	$16,000	$51,000	$21,000	$71,000
Net Income for Year -4	$14,000	$56,000	$12,000	$63,000	$13,000	$84,000
Net Income for Year-5	$14,000	$70,000	$9,000	$72,000	$12,000	$96,000

Payback period = Completed years + {(Initial Investment - amount received till completed years)/ Next inflow}

For project Bono:

Payback Period = 4 years + {($160,000 - $70,000) /$14,000}

= 10.43 Years

For project Edge:

Payback Period = 4 years + {($175,000 - $63,000) /$9,000}

= 16.44 Years

For project Clyton:

Payback Period = 4 years + {($200,000 - $84,000) /$12,000}

= 13.67 Years