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 $204,000 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.)

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                                                                      BonoClaytonEdge.

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 = 204000/5 = 40800
Years	annual net income (a)	depreciation(b)	cash flow(a)+(b)	cumulative cash flow
1	27810	40800	68610	68610
2	23690	40800	64490	133100
3	21630	40800	62430	195530
4	13390	40800	54190	249720
5	12360	40800	53160	302880
payback period = (204000-195530)/(249720-195530) = 0.16
payback period = 3years+0.16 = 3.16years
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	68610	0.86957	59660.87
2	64490	0.75614	48763.47
3	62430	0.65752	41048.97
4	54190	0.57175	30983.13
5	53160	0.49718	26430.09
	total		206886.53
	investment		-208000
	net present value		-1113.47
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)/(204000/2) = 19.39%
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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