Henkel 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.
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Project Kilo
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Project Lima
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Project Oscar
|
|
Capital investment
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$150,000
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$165,000
|
$200,000
|
|
Annual net income:
|
|
|
|
|
Year 1
|
14,000
|
18,000
|
27,000
|
|
?? 2
|
14,000
|
17,000
|
23,000
|
|
?? 3
|
14,000
|
16,000
|
21,000
|
|
?? 4
|
14,000
|
12,000
|
13,000
|
|
?? 5
|
14,000
|
9,000
|
12,000
|
|
Total
|
$? 70,000
|
$?72,000
|
$?96,000
|
|
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.)
Instructions
| (a) |
Compute the cash payback period for each project. (Round to two decimals.)
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| (b) |
Compute the net present value for each project. (Round to nearest dollar.)
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| (c) |
Compute the annual rate of return for each project. (Round to two decimals.)
(Hint: Use average annual net income in your computation.)
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| (d) |
Rank the projects on each of the foregoing bases. Which project do you recommend?
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