Question

Henkel 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 Kilo Project Lima Project Oscar Capital investment $165,850 $176,550 $200,850 Annual net income:     Year 1 13,910 18,725 29,425 2 13,910 17,655 24,075 3 13,910 16,585 23,005 4 13,910 12,305 14,445 5 13,910 9,095 13,375 Total $69,550 $74,365 $104,325 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. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Kilo years Project Lima years Project Oscar 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).) Project Kilo Project Lima Project Oscar 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 Kilo Project Lima Project Oscar Annual rate of return % % %

Rank the projects on each of the foregoing bases. Which project do you recommend? Project Cash Payback Net Present Value Annual Rate of Return Kilo 1, 2 or 3   1, 2 or 3   1, 2 or 3 Lima   1, 2 or 3   1, 2 or 3   1, 2 or 3 Oscar   1, 2 or 3   1, 2 or 3   1, 2 or 3 The best project is Lima, Oscar, or Kilo

Answer 1

A) Cash Payback :

Project Kilo :

Cash Payback = Amount Invested / Annual Cash Inflow

Here , Cash inflow = Net Income + Depreciation expense

Under Straight Line method :

Depreciation expense = (Cost -Salvage value ) / Useful life

Depreciation expense = ($165,850 - $ 0 ) / 5 Years

Depreciation expense = $ 33,170

Annual Cash inflow = $ 13,910 + $ 33,170 = $ 47,080

Cash Payback = Amount Invested / Annual Cash Inflow

Cash Payback = $ 165,850 / $ 47,080

Cash Payback = 3.52 Years

.

Project Lima :
Under Straight Line method :
Depreciation expense = (Cost -Solvage value ) / Useful life
Depreciation expense = ($176,550 - $ 0 ) / 5 Years
Depreciation expense = $ 35,310 per Annum
Year	Cash flow	Cumulative Cash flow
1	$54,035    {18,725+35,310}	$ 54,035
2	$52,965    {17,655+35,310}	$ 107,000 {54,035+52,965}
3	$51,895    {16,585+35,310}	$ 158,895 {107,000+51,895}
4	$47,615    {12,305+35,310}	$ 206,510 {158,895+47,615}
5	$44,405    {9,095+35,310}	$ 250,915 {206,510+44,405}
Investment covered by the end of 3 year is 158,895
Balance of Investment to be covered = $ 176,550 - $ 158,895 = $ 17,655
So, Cash payback period = 3 years + ( $ 17,655/ $ 47,615 )
Cash payback period = 3.37 Years
Project Oscar :
Under Straight Line method :
Depreciation expense = (Cost -Salvage value ) / Useful life
Depreciation expense = ($200,850 - $ 0 ) / 5 Years
Depreciation expense = $ 40,170 per Year
Year	Cash flow	Cumulative Cash flow
1	$69,595    {29,425+40,170}	$ 69,595
2	$64,245    {24,075+40,170}	$ 133,840 {69,595+64,245}
3	$63,175    {23,005+40,170}	$ 197,015 {133,840+63,175}
4	$54,615    {14,445+40,170}	$ 251,630 {197,015+54,615}
5	$53,545    {13,375 +40,170}	$ 305,175 {251,630+53,545}
Investment covered by the end of 3 year is 197,015
Balance of Investment to be covered = $ 200,850 - $ 197,015 = $ 3,835
So, Cash payback period = 3 years + ( $ 3,835/ $ 54,615 )
Cash payback period = 3.07 Years

.

B)
Project Kilo :
Item	Cash flow	Years	PV Factor	Present value Cash flows
Net annual Cash flow	$ 47,080	1-5 Years	3.35216	$157,820 {$47,080*3.35216}
Net investment	$ 165,850	Now	1	($165,850)
Net Present Value				($8,030)

Project Lima :
Year	Cash flow	PV factor	Present value Cash flows
1	$54,035    {18,725+35,310}	0.86957	$46,987     {54,035*0.86957}
2	$52,965    {17,655+35,310}	0.75614	$40,049     {52,965*0.75614}
3	$51,895    {16,585+35,310}	0.65752	$34,122     {51,895*0.65752}
4	$47,615    {12,305+35,310}	0.57175	$27,224     {47,615*0.57175}
5	$44,405    {9,095+35,310}	0.49718	$22,077     {44,405*0.49718}
Present value of Cash inflow			$ 170,459
Net investment			($176,550)
Net Present Value			($6,091)
Project Oscar :
Year	Cash flow	PV factor	Present value Cash flows
1	$69,595    {29,425+40,170}	0.86957	$60,518     {69,595*0.86957}
2	$64,245    {24,075+40,170}	0.75614	$48,578     {64,245*0.75614}
3	$63,175    {23,005+40,170}	0.65752	$41,539     {63,175*0.65752}
4	$54,615    {14,445+40,170}	0.57175	$31,226     {54,615*0.57175}
5	$53,545    {13,375 +40,170}	0.49718	$26,622     {53,545*0.49718}
Present value of Cash inflow			$ 208,483
Net investment			($200,850)
Net Present Value			$ 7,633

C) Annual Rate of return (ARR) = Average Net Income / Average Investment

Average Net Income = Total Net income for 5 years / 5 years.

Average investment = (Beginning investment + Ending Investment)/2

Project Kilo :

Annual Rate of return (ARR) = Average Net Income / Amount Invested

Annual Rate of return (ARR) =$ 69,550 / 5 years / ($165,850 +$ 0)/2

Annual Rate of return (ARR) =$ 13,910 / $ 82,925

Annual Rate of return (ARR) = 16.77 %

Project Lima :

Annual Rate of return (ARR) = Average Net Income / Amount Invested

Annual Rate of return (ARR) =$ 74,365 / 5 years / ($176,550 +$ 0)/2

Annual Rate of return (ARR) =$ 14,873 / $ 88,275

Annual Rate of return (ARR) = 16.85 %

Project Oscar :

Annual Rate of return (ARR) = Average Net Income / Amount Invested

Annual Rate of return (ARR) =$ 104,325 / 5 years / ($200,850 +$ 0)/2

Annual Rate of return (ARR) =$ 20,865 / $ 100,425

Annual Rate of return (ARR) = 20.78 %

Rank the Projects on each of the Foregoing bases :
Project	Cash Payback	Net Present Value	Annual rate of return
Project Kilo	3	3	3
Project Lima	2	2	2
Project Oscar	1	1	1
The Best project is Project Oscar Because of Cash pay back can recovered earlier compared
other projects and Net present Value of Project Oscar is positive and remaining are Negative
and Annual rate of return of Oscar is high compared to other .