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		$164,800		$180,250		$206,000
Annual net income:
Year  1		14,420		18,540		27,810
2		14,420		17,510		23,690
3		14,420		16,480		21,630
4		14,420		12,360		13,390
5		14,420		9,270		12,360
Total		$72,100		$74,160		$98,880

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.)

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

eTextbook and Media

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

eTextbook and Media

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 a percentage number rounded to 2 decimal places %		enter a percentage number rounded to 2 decimal places %		enter a percentage number rounded to 2 decimal places %

eTextbook and Media

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 rank of the project                                                                      132		select a rank of the project                                                                      231		select a rank of the project                                                                      321
Edge		select a rank of the project                                                                      132		select a rank of the project                                                                      123		select a rank of the project                                                                      123
Clayton		select a rank of the project                                                                      132		select a rank of the project                                                                      123		select a rank of the project                                                                      123

The best project is select the best project                                                                      EdgeBonoClayton.

Answer 1

Calculation of payback period
depreciation = 164800/5 = 32960
project bono
payback period = capital investment/cash inflow
payback period = 164800/(14420+32960) = 3.48 years
Project Edge
depreciation = 180250/5 = 36050
Years	annual net income (a)	depreciation(b)	cash flow(a)+(b)	cumulative cash flow
1	18540	36050	54590	54590
2	17510	36050	53560	108150
3	16480	36050	52530	160680
4	12360	36050	48410	209090
5	9270	36050	45320	254410
payback period = (180250-160680)/(209090-160680) = 0.40
payback period = 3+0.40 = 3.40years
project Clayton
depreciation = 206000/5 = 41200
Years	annual net income (a)	depreciation(b)	cash flow(a)+(b)	cumulative cash flow
1	27810	41200	69010	69010
2	23690	41200	64890	133900
3	21630	41200	62830	196730
4	13390	41200	54590	251320
5	12360	41200	53560	304880
payback period = (206000-196730)/(251320-196730) = 0.17
payback period = 3years+0.17 = 3.17 years
Net present value
project bono
year	cash inflow	pvf@15%	present value
1	47380	0.86957	41200
2	47380	0.75614	35825.9132
3	47380	0.65752	31153.2976
4	47380	0.57175	27089.515
5	47380	0.49718	23556.3884
	total		158825.1142
	investment		-164800
	net present value		-5974.8858
Project Edge
year	cash inflow	pvf@15%	present value
1	54590	0.86957	47469.57
2	53560	0.75614	40498.86
3	52530	0.65752	34539.53
4	48410	0.57175	27678.42
5	45320	0.49718	22532.20
	total		172718.56
	investment		-180250
	net present value		-7531.44
project Clayton
year	cash inflow	pvf@15%	present value
1	69010	0.86957	60008.70
2	64890	0.75614	49065.92
3	62830	0.65752	41311.98
4	54590	0.57175	31211.83
5	53560	0.49718	26628.96
	total		208227.40
	investment		-206000
	net present value		2227.40
Annual rate of return = average net profit/average investment
project bono = 14420/(164800/2) = 17.5%
project edge = (74160/5)/(180250/2) = 16.46%
project clayton = (98880/5)/(206000/2) = 19.20%
Rank
project	cash payback	net present value	annual rate of return
Bono	3	2	2
Edge	2	3	3
Clayton	1	1	1
the best project is Clayton

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