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U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of...

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.

Solutions

Expert Solution

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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