Question

Problem 26-5A (Part Level Submission) 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 $204,000 Capital investment $164,800 $180,250 Annual net income: 14,420 Year 1 18,540 27,810 14,420 17,510 2 23,690 16,480 3 14,420 21,630 4 14,420 12,360 13,390 12,360 5 14,420 9,270 $72,100 $74,160 $98,880 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.) Click here to view PV table. click here to view PV of Annuity table.

Answer 1

U3 company shall analyse three long term capital investment proposals by calculating net present value. The net present value is computed by

Present value of inflows= Future value/(Present value interest factor)

Net present value = Present value of inflows – Capital investment

If NPV is positive, then only investment is to be made.

Particulars		Project Bono		Project Edge		Project Clayton
	PV Factor (a)	Amount (b)	Net Present Value (a x b)	Amount (c)	Net Present Value (a x c)	Amount (d)	Net Present Value (a x d)
Capital investment (a)	1	(164,800)	(164,800)	(180,250)	(180,250)	(204,000)	(204,000)
Annual net income:
Year 1	0.86957	$14,420	$12,539	$18,540	$16,122	$27,810	$24,183
2	0.75614	$14,420	$10,904	$17,510	$13,240	$23,690	$17,913
3	0.65752	$14,420	$9,481	$16,480	$10,836	$21,630	$14,222
4	0.57175	$14,420	$8,245	$12,360	$7,067	$13,390	$7,656
5	0.49718	$14,420	$7,169	$9,270	$4,609	$12,360	$6,145
NPV			($116,462)		($128,377)		($133,881)

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