Henkel Corporation is considering two long-term capital investment proposals. Relevant data on each project are as follows.
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Project
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Brown
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Red
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Capital investment
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$249,400
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$189,610
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Annual net income:
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Year
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1
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26,152
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25,425
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2
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24,312
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16,323
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3
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23,239
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13,021
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4
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17,104
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10,067
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5
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20,093
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8,472
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Total
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$ 110,900
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$73,308
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Depreciation is computed by the straight-line method with no salvage value. The company's minimum rate of return is the company's cost of capital which is 12%. Assume cash flows occur evenly throughout the year
Instructions:
Compute the following and rank the projects for each category:
- Compute the average annual rate of return for each project. (Round your answers to 1 decimal place.)
- Compute the cash payback period for each project. (Round your answers to 2 decimal places.)
- Compute the net present value for each project. (Round your answers to 0 decimal places.)
- Rank the projects on each of the foregoing bases. Which project do you recommend and WHY?