Problem 26-1A

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 Project Edge Project Clayton Capital investment $174,400 $190,750 $218,000 Annual net income: Year 1 15,260 19,620 29,430 2 15,260 18,530 25,070 3 15,260 17,440 22,890 4 15,260 13,080 14,170 5 15,260 9,810 13,080 Total $76,300 $78,480 $104,640

Depreciation is computed by the straight-line method with no salvage value. The companys cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.) Click here to view PV table.

Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)

Project Bono years Project Edge years Project Clayton years

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Compute the net present value for each project. (Round answers to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Project Bono Project Edge Project Clayton Net present value $ $ $

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Compute the annual rate of return for each project. (Hint: Use average annual net income in your computation.) (Round answers to 2 decimal places, e.g. 10.50.)

Project Bono Project Edge Project Clayton Annual rate of return % % %

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Rank the projects on each of the foregoing bases. Which project do you recommend?

Project Cash Payback Net Present Value Annual Rate of Return Bono 1 3 2 2 3 1 3 2 1 Edge 1 3 2 1 2 3 1 2 3 Clayton 1 3 2 1 2 3 1 2 3

The best project is Clayton Bono Edge .