Question

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		$206,000
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.)

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

Project Bono		enter the cash payback period in years rounded to 2 decimal places	years
Project Edge		enter the cash payback period in years rounded to 2 decimal places	years
Project Clayton		enter the cash payback period in years rounded to 2 decimal places	years

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Compute the net present value for each project. (Round answers to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

		Project Bono		Project Edge		Project Clayton
Net present value		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places

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Compute the annual rate of return for each project. (Hint: Use average annual net income in your computation.) (Round answers to 2 decimal places, e.g. 10.50%.)

		Project Bono		Project Edge		Project Clayton
Annual rate of return		enter percentages rounded to 2 decimal places %		enter percentages rounded to 2 decimal places %		enter percentages rounded to 2 decimal places %

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Rank the projects on each of the foregoing bases. Which project do you recommend?

Project		Cash Payback		Net Present Value		Annual Rate of Return
Bono		select a ranking number                                                                      132		select a ranking number                                                                      231		select a ranking number                                                                      321
Edge		select a ranking number                                                                      132		select a ranking number                                                                      123		select a ranking number                                                                      123
Clayton		select a ranking number                                                                      132		select a ranking number                                                                      123		select a ranking number                                                                      123

The best project is select a project                                                                      ClaytonEdgeBono.

Answer 1

AWN $0.00 Cash Payback Period Formula = Initial Investment / Annual cah inflows Project BONO Year Capital Investment Annual Net Income -$1,64,800.00 $0.00 $0.00 $14,420.00 $0.00 $14,420.00 $14,420.00 $0.00 $14,420.00 $0.00 $14,420.00 Cash Payback Period 11.43 Years Project EDGE Year Capital Investment Annual Net Income $1,80,250.00 $0.00 $0.00 $18,540.00 $0.00 $17,510.00 $0.00 $16,480.00 $0.00 $12,360.00 $0.00 $9,270.00 Total $74,160.00 Average Net income $14,832.00 Cash Payback Period 12.15 Years Project CLAYTON Year Capital Investment Annual Net Income $2,06,000.00 $0.00 $0.00 $27,810.00 $0.00 $23,690.00 $0.00 $21,630.00 $0.00 $13,390.00 $0.00 $12,360.00 $98,880.00 Average Net income $19,776.00 Cash Payback Period 10.42 Years WNO Total

Net Present value Project BONO Capital Investment Net cash flows Present value of $1@15% $1,64,800.00 $0.00 $0.00 $0.00 $0.00 $0.00 Annual Net Income $0.00 $14,420.00 $14,420.00 $14,420.00 $14,420.00 $14,420.00 -$1,64,800.00 $14,420.00 $14,420.00 $14,420.00 $14,420.00 $14,420.00 0.87 0.756 0.658 0.572 0.497 Net Present value Present value of cash flows $1,64,800.00 $12,545.40 $10,901.52 $9,488.36 $8,248.24 $7,166.74 $1,16,449.74 Project EDGE Annual Net Income Year Net cash flows Present value of $1@15% Capital Investment $1,80,250.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $18,540.00 $17,510.00 $16,480.00 $12,360.00 $9,270.00 -$1,80,250.00 $18,540.00 $17,510.00 $16,480.00 $12,360.00 $9,270.00 0.87 0.756 0.658 0.572 0.497 Net Present value Present value of cash flows $1,80,250.00 $16,129.80 $13,237.56 $10,843.84 $7,069.92 $4,607.19 $1,28,361.69 Capital Investment Net cash flows -$2,06,000.00 $0.00 Project CLAYTON Annual Net Income $0.00 $27,810.00 $23,690.00 $21,630.00 $13,390.00 $12,360.00 $0.00 $0.00 $0.00 $0.00 -$2,06,000.00 $27,810.00 $23,690.00 $21,630.00 $13,390.00 $12,360.00 Present value of Present value of $1 @15% cash flows -$2,06,000.00 0.87 $24,194.70 0.756 $17,909.64 0.658 $14,232.54 0.572 $7,659.08 0.497 $6,142.92 Net Present value $1,35,861.12

Net cash flows Annual Rate of Return Annual rate of return = Annual cash flows / Initial investment Project BONO Depreciation Year Annual Net Income (Cost-Salvage $14,420.00 $32,960.00 $14,420.00 $32,960.00 $14,420.00 -$32,960.00 $14,420.00 $32,960.00 $14,420.00 $32,960.00 Accounting rate of return Inital investment $1,64,800.00 Annual net income $18,540.00 Accounting rate of return -11.25% $18,540.00 $18,540.00 $18,540.00 $18,540.00 $18,540.00 Project EDGE Annual Net Income Depreciation Year Net cash flows $18,540.00 $17,510.00 $16,480.00 $12,360.00 $9,270.00 $36,050.00 $36,050.00 $36,050.00 $36,050.00 $36,050.00 Total Average -$17,510.00 $18,540.00 $19,570.00 $23,690.00 -$26,780.00 -$1,06,090.00 -$21,218.00 Accounting rate of return Inital investment Annual net income Accounting rate of return $1,80,250.00 $21,218.00 -11.77%

Annual Rate of Return Annual rate of return = Annual cash flows / Initial investment Project CLAYTON Annual Net Income Depreciation Year Net cash flows $27,810.00 $23,690.00 $21,630.00 $13,390.00 $12,360.00 $41,200.00 $41,200.00 -$41,200.00 $41,200.00 -$41,200.00 Total Average -$13,390.00 -$17,510.00 -$19,5 70.00 -$27,810.00 -$28,840.00 $1,07,120.00 -$21,424.00 Accounting rate of return Inital investment Annual net income Accounting rate of return $2,06,000.00 $21,424.00 -10.40% Project Cash Payback Period Rank NPV Rank Rank BONO EDGE CLAYTON 11.43 12.15 10.42 Annual rate of return -11.25% -11.77% -10.40% $1,16,449.74 $1,28,361.69 $1,35,861.12 3 3 1 The best project to select is = Project Clayton