Pateos Corporation is considering three long-term capital investment proposals.
ID: 2372302 • Letter: P
Question
Pateos Corporation 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. Depreciation is computed by the straight-line method with no salvage value.fhe company's cost of capital is 15%. Instructions Compute the annual rate of return for each project. (Round lo one decimal.) Compute the cash payback period for each project. (Round to two decimals.) Compute the net present value for each project. (Round to neatest dollar.) Rank the projects on each of the foregoing bases. Which project do you recommend?Explanation / Answer
Red : Dep SLN = 160000/5=32000
So Net Inc pa = 13000+Dep written back = 13000+32000 = 45000
As Net Inc is same in all years, AvgeAnnual Inc = 45000
a. Annual Rat eof Ret = 45000/160000 = 28.1%
b. Cash PBP = Inv/Annual CF = 160000/45000 =3.56
c. NPV = NPV(15%,45000,45000,45000,45000,45000)-160000
= -$9,153
White: Dep SLN = 180000/5=36000
So Net Inc Y1= 18000+36000 = 54000
Y2 = 17000+36000 = 53000
Y3=16000+36000 =52000
Y4=12000+36000 =48000
Y5=9000+36000 = 45000
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Total 252000
SO Avge Anual CF = 252000/5 = 50400
a. Annual Rate of Ret = 50400/180000 =28.0%
b. Cash PBP = Inv/Annual CF
= 3+(180000-54000-53000-52000)/48000 =3.44
c. NPV = NPV(15%,54000,53000,52000,48000,45000)-180000
= -$8,960
Blue : Dep SLN = 200000/5=40000
So Net Inc Y1= 27000+40000 =67000
Y2 = 22000+40000 = 62000
Y3=16000+40000 =56000
Y4=13000+40000 =53000
Y5=12000+40000 = 52000
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Total 290000
SO Avge Anual CF = 290000/5 = 58000
a. Annual Rat eof Ret = 58000/290000 = 20.0%
b. Cash PBP = Inv/Annual CF
= 3+(200000-67000-62000-56000)/53000 =3.28
c. NPV = NPV(15%,67000,62000,56000,53000,52000)-200000
=-$1,881
Based on Anual Return, Proj Red, White, Blue
Based on Cash PBP, Proj Blue, White, Red
Based on NPV, Proj Blue, White, Red