Dog River Company is considering two capital investment proposals. Relevant data on each project are as follows:

Project Red Project Blue

Capital investment $210,000 $980,000

Annual net income 15,000 90,000

Estimated useful life 7 years 7 years

Depreciation is calculated by the straight-line method with no salvage value. Dog River requires a10% rate of return on all new investments. The present value of 1 for 7 periods at 10% is .513 and the present value of an annuity of 1 for 7 periods is 4.868.

Instructions

(a) Calculate the cash payback period for each project. 4 Marks

(b) Calculate the net present value for each project. 4 Marks

(c) Calculate the annual rate of return for each project. 4 Marks

(d) Which project should Dog River select? 2 Marks