Problem 12-1A (Part Level Submission) Depreciation is computed by the straight-l
ID: 2489972 • Letter: P
Question
Problem 12-1A (Part Level Submission)
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 cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)
Problem 12-1A (Part Level Submission)
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 cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)
Explanation / Answer
Problem is silent of about the discounted or non-discounted cash flow, so we are calculating Non-discounted cash flow:
Project Edge = 54590+53560+52530 = 160680 (cummulative cash flow of three years)
Cash Payback period = 3 + (180250-160680) /48410 = 3.40 years
Project Clayton = 68610+64490+62430 = 195530 (cummulative cash flow of three years)
Cash Payback period = 3 + (204000-195530) /54190 = 3.16 years
Project Bono Project Edge Project Clayton Capital investment $164,800 $180,250 $204,000 Annual Cash Flow: Net Income + Depreciation Year 1 14,420+32960 = 47380 18,540+36050 = 54590 27,810+40800 = 68610 2 47380 53560 64490 3 47380 52530 62430 4 47380 48410 54190 5 47380 45320 53160 Project BonoCash Payback period: 164800/47380 =3.48 years