Problem 12-1A U3 Company is considering three long-term capital investment propo
ID: 2527612 • Letter: P
Question
Problem 12-1A 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 $171,200 Project Edge $187,250 Project Clayton $202,000 Capital investment Annual net income: Year 1 14,980 14,980 14,980 14,980 14,980 $74,900 19,260 18,190 17,120 12,840 9,630 $77,040 28,890 24,610 22,470 13,910 12,840 $102,720 4 Total 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.) Project Bono Project Edge Project Clayton years years yearsExplanation / Answer
Depreciation using Straight line method = (cost - salvage value) / useful life
Project Bono
Annual cash flows = Annual net income + Deprecitaion
= 14,980 + 34,240
= 49,220
Payback period = Initial investment / Annual cash flows
= 171,200 / 49,220
= 3.48 years.
Project Edge
Annual cash flows = Net income + Depreciation
Payback period = 3 years + [(187,250-166,920)/50,290]
= 3 + 0.40
= 3.4 years
Project Clayton
Annual cash flows = Annual net income + Depreciation
Pay back period = 3 years + (202,000-197,170)/54,310
= 3 + 0.09
= 3.09 years
Depreciation Project Bono 34,240 [(171,200-0)/5] Project Edge 37,450 [(187,250-0)/5] Project Clayton 40,400 [(202,000-0)/5]