Problem 12-1A U3 Company is considering three long-term capital investment propo

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 2 3 4 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 Total year) 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 ick her ew able

Explanation / Answer

Project BONO: Year Net Income Depreciation Annual Cash PVF @ 15% Present values Inflows 1 14980 34240 49220 0.869565 42800 2 14980 34240 49220 0.756144 37217.39 3 14980 34240 49220 0.657516 32362.95 4 14980 34240 49220 0.571753 28141.69 5 14980 34240 49220 0.497177 24471.04 Present value of Inflows 164993 Less: Initial Investment 171200 NPV -6207 Project Edge:; Year Net Income Depreciation Annual Cash PVF @ 15% Present values Inflows 1 19260 37450 56710 0.869565 49313.04 2 18190 37450 55640 0.756144 42071.83 3 17120 37450 54570 0.657516 35880.66 4 12840 37450 50290 0.571753 28753.47 5 9630 37450 47080 0.497177 23407.08 Present value of Inflows 179426 Less: Initial Investment 187250 NPV -7824 Project Clayton: Year Net Income Depreciation Annual Cash PVF @ 15% Present values Inflows 1 28890 40400 69290 0.869565 60252.17 2 24610 40400 65010 0.756144 49156.9 3 22470 40400 62870 0.657516 41338.05 4 13910 40400 54310 0.571753 31051.92 5 12840 40400 53240 0.497177 26469.69 Present value of Inflows 208269 Less: Initial Investment 202000 NPV 6269 BONO EDGE CLAYTON NPV -6207 -7824 6269

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