Question

Problem 12-1A (Video)

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		$168,000		$183,750		$202,000
Annual net income:
Year  1		14,700		18,900		28,350
2		14,700		17,850		24,150
3		14,700		16,800		22,050
4		14,700		12,600		13,650
5		14,700		9,450		12,600
Total		$73,500		$75,600		$100,800

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 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

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		$		$

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		%		%		%

Answer 1

Calculation of payback period

depreciation = 168000/5 = 33600

project bono

payback period = capital investment/cash inflow

payback period = 168000/(14700+33600) = 3.48 years

Project Edge
depreciation = 183750/5 = 36750
Years	annual net income (a)	depreciation(b)	cash flow(a)+(b)	cumulative cash flow
1	18900	36750	55650	55650
2	17850	36750	54600	110250
3	16800	36750	53550	163800
4	12600	36750	49350	213150
5	9450	36750	46200	259350
payback period = (183750-163800)/(213150-163800) = 0.40
payback period = 3+0.40 = 3.40years

project Clayton
depreciation = 202000/5 = 40400
Years	annual net income (a)	depreciation(b)	cash flow(a)+(b)	cumulative cash flow
1	28350	40400	68750	68750
2	24150	40400	64550	133300
3	22050	40400	62450	195750
4	13650	40400	54050	249800
5	12600	40400	53000	302800

payback period = (202000-195750)/(249800-195750) = 0.12

payback period = 3years+0.12= 3.12years

Net present value
project bono
year	cash inflow	pvf@15%	present value
1	48300	0.86957	42000
2	48300	0.75614	36521.562
3	48300	0.65752	31758.216
4	48300	0.57175	27615.525
5	48300	0.49718	24013.794
	total		161909.097
	investment		-168000
	net present value	-6090.903
Project Edge
year	cash inflow	pvf@15%	present value
1	55650	0.86957	48391.30
2	54600	0.75614	41285.24
3	53550	0.65752	35210.20
4	49350	0.57175	28215.86
5	46200	0.49718	22969.72
	total		176072.32
	investment		-183750
	net present value	-7677.68
project Clayton
year	cash inflow	pvf@15%	present value
1	68750	0.86957	59782.61
2	64550	0.75614	48808.84
3	62450	0.65752	41062.12
4	54050	0.57175	30903.09
5	53000	0.49718	26350.54
	total		206907.20
	investment		-202000
	net present value	4907.20
Annual rate of return = average net profit/average investment
project bono = 14700/(168000/2) = 17.5%
project edge = (75600/5)/(183750/2) = 16.46%
project clayton = (100800/5)/(202000/2) = 19.20%