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
- Compute the cash payback period for each project. (Round to two decimals.)
- Compute the net present value for each project. (Round to nearest dollar.)
- Compute the annual rate of return for each project. (Round to two decimals.)
- Rank the projects on each of the foregoing bases. Which project do yourecommend?
Solution
(a) Project Bono $160,000 / ($14,000 + $32,000) = 3.48 years
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Project Edge |
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Year |
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Cash Flow |
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Cumulative Cash Flow |
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1 2 3 4 5 |
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$53,000 ($18,000 + $35,000) $52,000 ($17,000 + $35,000) $51,000 ($16,000 + $35,000) $47,000 ($12,000 + $35,000) $44,000 ($ 9,000 + $35,000) |
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$ 53,000 $105,000 $156,000 $203,000 $247,000 |
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Cash payback period 3.40 years
$175,000 - $156,000 = $19,000
$19,000 / $47,000 = .40
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Project Clayton |
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Year |
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Cash Flow |
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Cumulative Cash Flow |
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1 2 3 4 5 |
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$67,000 ($27,000 + $40,000) $63,000 ($23,000 + $40,000) $61,000 ($21,000 + $40,000) $53,000 ($13,000 + $40,000) $52,000 ($12,000 + $40,000) |
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$ 67,000 $130,000 $191,000 $244,000 $296,000 |
Cash payback period 3.17 years
$200,000 - $191,000 = $9,000
$9,000 / $53,000 = .17
(b) Project Bono
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Amount |
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Years |
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PV Factor |
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Present Value |
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Net annual cash flows Less: Capital investment Negative net present value |
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$46,000 |
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1-5 |
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3.35216 |
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$154,199 160,000 $ (5,801) |
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Project Edge |
Project Clayton |
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Year |
Discount Factor |
Cash Flow |
PV |
Cash Flow |
PV |
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1 2 3 4 5 Total |
.86957 .75614 .65752 .57175 .49718 |
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$ 53,000 52,000 51,000 47,000 44,000 $247,000 |
$ 46,087 39,319 33,534 26,872 21,876 167,688 175,000
$ (7,312) |
$ 67,000 63,000 61,000 53,000 52,000 $296,000 |
$ 58,261 47,637 40,109 30,303 25,853 202,163 200,000
$ 2,163 |
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Less: Capital |
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Positive (negative) net present value |
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(c) Project Bono = $14,000 / [($160,000 + $0) / 2] = 17.5%.
Project Edge = $14,400 / [($175,000 + $0) / 2] = 16.5%.
Project Clayton = $19,200 / [($200,000 + $0) / 2] = 19.2%.
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(d) |
Project |
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Cash Payback |
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Net Present Value |
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Annual Rate of Return |
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Bono Edge Clayton |
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3 2 1 |
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2 3 1 |
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2 3 1 |
The best project is Clayton.