Problem 12-1A (Part Level Submission) Henkel Company is considering three long-t

Question

Problem 12-1A (Part Level Submission) 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 $167,400 $178,200 $212,550 Annual net income: Year 1 14,040 18,900 29,700 2 14,040 17,820 24,300 3 14,040 16,740 23,220 4 14,040 12,420 14,580 5 14,040 9,180 13,500 Total $70,200 $75,060 $105,300 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.) (Refer the below table)

Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)

Explanation / Answer

project kilo

payabck period = initial outflow / annual inflow

= 167400 / 14040 + 33480

= 167400 /47520

= 3.52 year   

Note:- Depreciation is a non cash expenses which reduces the net income, so add back it

cash inflow = Net income + Depreciation

  Depreciation =167400 /5 = 33480

Project Lima

Year (cash inflow + Depreciation) Cumulative cash inflow

1 54540 54540

2 53460 108000

3 52380 160380

4 48060 208440

5 44820 253260

payabck period = 3 year + (178200 - 160380) / 48060

   = 3year + 0.37year

= 3.37 year

Note:- Depreciation = 178200 / 5 =35640

project Oscar:

year cash inflow + Depreciation Cumulative cash inflow

1 72210 72210

2 66810 139020

3 65730 204750

4 57090 261840

5 56010 317850

Payback period = 3 year + (212550 - 204750) / 57090

   = 3 year + 0.14 years

= 3.14 year

Note:- Depreciation = 212550 / 5 = 42510

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