Problem 12-1A U3 Company is considering three long-term capital investment propo
ID: 2560675 • 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 $163,200 Project Edge $178,500 Project Clayton $204,000 Capital investment Annual net income: Year 1 14,280 14,280 14,280 14,280 14,280 $71,400 18,360 17,340 16,320 12,240 9,180 $73,440 27,540 23,460 21,420 13,260 12,240 $97,920 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 years LINK TO TEXT LINK TO TEXT LINK TO TEXT VIDEO: SIMILAR PROBLEMExplanation / Answer
Solution: a. Cash payback period Project Bono 3.48 Years Project Edge 3.40 years Project Clayton 3.17 Years Working Notes: Project Bono Depreciation per year =$163,200/5 =32,640 Cash payback period = Capital investment /(Annual equal net income + Depreciation) = $163,200/($14,280 + $32,640) =3.4782609 =3.48 years Project Edge Depreciation per year =$178,500/5 =$35,700 Year Cash Flow Depreciation Value Cum. cash In-Flow 0 -178,500 -178500 1 18,360 35,700 -124,440 2 17,340 35,700 -71,400 3 16,320 35,700 -19,380 4 12,240 35,700 28,560 5 9,180 35,700 73,440 Project A Payback period = 3 years + Remaining balance/4th year cash inflows = 3 + 19,380/(12,240+35,700) = 3 + 19,380/47,940 =3.404255319 =3.40 Years Project Clayton Depreciation per year =$204,000/5 =$40,800 Year Cash Flow Depreciation Value Cum. cash In-Flow 0 -204,000 -204000 1 27,540 40,800 -135,660 2 23,460 40,800 -71,400 3 21,420 40,800 -9,180 4 13,260 40,800 44,880 5 12,240 40,800 97,920 Project A Payback period = 3 years + Remaining balance/4th year cash inflows = 3 + 9,180/(13,260+40,800) = 3 + 9,180/54,060 =3.169811 =3.17 Years b. Project Bono Project Edge Project Clayton Net Present Value -5917 -7458 2206 Working Notes: Project Bono Project Edge Project Clayton Year PVF @ 15% Cash Flow Present Value Cash Flow Present Value Cash Flow Present Value 0 1 -163,200 -163200 -178,500 -178,500 -204,000 -204,000 1 0.869565 46,920 40800 54,060 47,009 68,340 59,426 2 0.756144 46,920 35478 53,040 40,106 64,260 48,590 3 0.657516 46,920 30851 52,020 34,204 62,220 40,911 4 0.571753 46,920 26827 47,940 27,410 54,060 30,909 5 0.497177 46,920 23328 44,880 22,313 53,040 26,370 NPV -5917 NPV -7,458 NPV 2,206 Notes: PVF is calculated @ 15% = 1/(1+0.15)^n where n is the period for which PVF is calculated. Cash= Annual net incomes +Depreciation c. Project Bono Project Edge Project Clayton Annual rate of return 17.50% 16.46% 19.20% Working Notes: Project Bono Annual rate of return = Average net income / (Op/g Capital investment + Closing investment )/2 =( $71,400/5) / ($163,200 + $0)/2 =$14,280/81,600 =0.175 =17.50 % Project Edge Annual rate of return = Average net income / (Op/g Capital investment + Closing investment )/2 =( $73,440/5) / ($178,500 + $0)/2 =$14,688/89,250 =0.164571 =16.46% Project Clayton Annual rate of return = Average net income / (Op/g Capital investment + Closing investment )/2 =( $97,920/5) / ($204,000 + $0)/2 =$19,584/102,000 =0.192 =19.20 % d. Statement of Ranking Project Cash Payback Net Present Value Annual rate of return Bono 3 2 2 Edge 2 3 3 Clayton 1 1 1 The Best project is Clayton Working Notes: Project Cash Payback Ranking Net Present Value Ranking Annual rate of return Ranking Bono 3.48 Years 3 -5917 2 17.50% 2 Edge 3.40 years 2 -7458 3 16.46% 3 Clayton 3.17 Years 1 2206 1 19.20% 1 The Best project is CLAYTON As it is best in each bases of criteria of performance Please feel free to ask if anything about above solution in comment section of the question.