P26-14 Compute annual rate of return, cash payback and net presentable 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 $160,000 Project Edge S175,000 Project Clayton $200,000 1 Capital investment Annual net income Year 2 3 4 5 Total 14,000 14,000 14,000 14,000 14,000 $70,000 18,000 17.000 16,000 12,000 9,000 $72,000 27,000 23,000 21.000 13,000 12,000 $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.) (6) Compute the net present value for each project. (Round to nearest dollar.) (c) Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.) (d) Rark the projects on each of the foregoing bases. Which project do you recommend? NOTE Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" (a) Project Bono Value Net income Depreciation Annual net cash flows ? Investment Annual net cash flows Payback period in years Value Value ? ? Proiect Edge Net Income ? Year Annual Depreciation ? Cumulative Net Cash Flow 2 1 2 Net Annual Cash Flow ? ? ? ? ? 3 ? ? ? ? - 4 5 Value ? Cash Payback Period: Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered (a) Net cash flow, year 4 (b) Payback period, year 4 (a) (b) Total cash payback period in years ? Value ? Project Clayton Net Income Annual Depreciation Net Annual Cash Flow Cumulative Net Cash Flow Year 2 ? ? ? ? ? 2 2 3 4 5 2 ? 2 - ? ? 2 Value Cash Payback Period: Capital investment Cumulative cash flow, year 3 Remaining cost to be recovered (a) Net cash flow, year 4 (b) Cash payback period, year 4 (a) + (b) Total cash payback period in years ? Value Value Value (b) Project Bong Item Amount Value Years 1-5 15% PV Factor 3.35216 Present Value ? Value Net annual cash flows Capital investment Negative net present value Project Edge Year 15% Discount Factor 0.86957 0.75614 0.65752 0.57175 0.49718 Present Value ? ? 2 3 Cash Flow Value Value Value Value Value Value Project Clayton Cash Present Flow Value Value ? Value ? Value ? Value ? Value Value ? Value 4 5 2 Total Capital Investment Net present value ? Value ? (c) Project Bono Value Project Edge Value Project Clayton Value Average net income over 5 years Original Investment Value at end of useful life Average investment Value Value ? Value Value Value Value ? 2 Average net income (a) Average investment (b) Annual rate of return (a)+(b) Value Value ? Value Value Value Value ? (d) Edge Clayton VIITUTO Value Value Value Value Varu Value Value
