Question

Problem 25-01A 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 $171,200 $187,250 $208,000 Annual net income: Year  1 14,980 19,260 28,890         2 14,980 18,190 24,610         3 14,980 17,120 22,470         4 14,980 12,840 13,910         5 14,980 9,630 12,840 Total $74,900 $77,040 $102,720 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.

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 Link to Text Link to Video

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 Link to Text Link to Video

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 enter percentages rounded to 2 decimal places % enter percentages rounded to 2 decimal places % enter percentages rounded to 2 decimal places % Link to Text Link to Video

Rank the projects on each of the foregoing bases. Which project do you recommend? Project Cash Payback Net Present Value Annual Rate of Return Bono select a ranking number

select a ranking number

select a ranking number

Edge		select a ranking number

select a ranking number

select a ranking number

Clayton		select a ranking number

select a ranking number

select a ranking number

The best project is select a project

.

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Answer 1

Calculation of payback period for Project Bono
Project Bono	Capital investment/Annual cash flow
Annual cash flow
Annual net income	$14,980
Add: Depreciation	$34,240	171200/5
Annual cash flow	$49,220
Project bono	171200/49220
Project bono	3.48	years
calculation of NPV = present value of inflow - present value of outflow
annual cash flow	$49220
PVAF @15% ,5 years	3.35215509
present value of cash flow	$164993
NPV = $164993-171200 = -6207

Project Edge
Year	Net income	Depreciation (187250/5)	Cash flow	Cumulative cash flow	discount factor @ 15%	Cash flow X dicounted factor
0			-$187,250		1	-187250
1	$19,260	$37,450	$56,710	56710	0.86957	49313
2	$18,190	$37,450	$55,640	112350	0.75614	42072
3	$17,120	$37,450	$54,570	166920	0.65751	35880
4	$12,840	$37,450	$50,290	217210	0.57175	28753
5	$9,630	$37,450	$47,080	264290	0.497176	23407
						total inflow= 179425
Payback period	3 years + (187250-166920)/50290				NPV = 179425-187250= $-7825
Payback period	3.40	years

Project Clayton
Year	Net income	Depreciation (208000/5)	Cash flow	Cumulative cash flow	discount factor @ 15%	Cash flow X dicounted factor
0			-$208,000		1	-208000
1	$28,890	$41,600	$70490	$70490	0.86957	64426
2	$24,610	$41,600	$66210	$120650	0.75614	50064
3	$22,470	$41,600	$64070	$184720	0.65751	42127
4	$13,910	$41,600	$55510	$240230	0.57175	31738
5	$12,840	$41,600	$54440	$294670	0.497176	27066
						Total inflow =215421
Payback period	3 years + (23280/55510)				NPV = 215421-208000= $7421
Payback period	3.42	years

Annual rate of return	Average annual net income/Average investment
Project Bono
Annual rate of return	(74900/5)/((171200+0)/2)
Annual rate of return	14980/85600
Annual rate of return	17.50%
Project Edge
Annual rate of return	(77040/5)/((187250+0)/2)
Annual rate of return	15408/93625
Annual rate of return	16.46%
Project Clayton
Annual rate of return	(102720/5)/((208000+0)/2)
Annual rate of return	20544/104000
Annual rate of return	19.75%

Ranking of project
	Cash payback	Net present value	Annual rate of return
Bono	3	2	2
Edge	1	3	3
Clayton	2	1	1
The best project is Clayton because npv and annual rate of return is more as compare to bono and edge