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		$172,800		$189,000		$206,000
Annual net income:
Year  1		15,120		19,440		29,160
2		15,120		18,360		24,840
3		15,120		17,280		22,680
4		15,120		12,960		14,040
5		15,120		9,720		12,960
Total		$75,600		$77,760		$103,680

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 the factor table.

(a)

Correct answer iconYour answer is correct.

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 rounded to 2 decimal places	years
Project Edge		enter the cash payback period in years rounded to 2 decimal places	years
Project Clayton		enter the cash payback period in years rounded to 2 decimal places	years

eTextbook and Media

  

Attempts: 2 of 15 used

(b)

New attempt is in progress. Some of the new entries may impact the last attempt grading.Your answer is incorrect.

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

Answer 1

Answer to Part a.
Project Bono:
Depreciation Expense per year = (Cost – Salvage Value) / Useful Life
Depreciation Expense per year = ($172,800 - $0) / 5
Depreciation Expense per year = $34,560

Annual Cash Inflow = Annual Net Income + Depreciation Expense per year
Annual Cash Inflow = $15,120 + $34,560
Annual Cash Inflow = $49,680

Payback Period = Initial Investment / Annual Cash Inflow
Payback Period = $172,800 / $49,680
Payback Period = 3.48 years

Project Edge:
Depreciation Expense per year = (Cost – Salvage Value) / Useful Life
Depreciation Expense per year = ($189,000 - $0) / 5
Depreciation Expense per year = $37,800

Annual Cash Inflow = Annual Net Income + Depreciation Expense per year

Annual Cash Inflow, Year 1 = $19,440 + $37,800 = $57,240
Annual Cash Inflow, Year 2 = $18,360 + $37,800 = $56,160
Annual Cash Inflow, Year 3 = $17,280 + $37,800 = $55,080
Annual Cash Inflow, Year 4 = $12,960 + $37,800 = $50,760
Annual Cash Inflow, Year 5 = $9,720 + $37,800 = $47,520

Project Clayton:
Depreciation Expense per year = (Cost – Salvage Value) / Useful Life
Depreciation Expense per year = ($206,000 - $0) / 5
Depreciation Expense per year = $41,200

Annual Cash Inflow = Annual Net Income + Depreciation Expense per year

Annual Cash Inflow, Year 1 = $29,160 + $41,200 = $70,360
Annual Cash Inflow, Year 2 = $24,840 + $41,200 = $66,040
Annual Cash Inflow, Year 3 = $22,680 + $41,200 = $63,880
Annual Cash Inflow, Year 4 = $14,040 + $41,200 = $55,240
Annual Cash Inflow, Year 5 = $12,960 + $41,200 = $54,160