Problem 26-1A 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 |
Project Edge |
Project Clayton |
| Capital investment |
$164,800 |
$180,250 |
$204,000 |
|
| 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.)
Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)
| Project Bono |
|
years |
| Project Edge |
|
years |
| Project Clayton |
|
years |
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.)
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.)
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 |
1 3 2 |
2 3 1 |
3 2 1 |
| Edge |
1 3 2 |
1 2 3 |
1 2 3 |
| Clayton |
1 3 2 |
1 2 3 |
1 2 3 |