LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO VIDEO a Open

LINK TO TEXT

LINK TO TEXT

LINK TO TEXT

LINK TO VIDEO

(a)

Open Show Work

SHOW SOLUTION

SHOW ANSWER

LINK TO TEXT

LINK TO TEXT

LINK TO TEXT

LINK TO VIDEO

(b)

Compute the net present value for each project

c.Compute the annual rate of return for each project

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

Henkel 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 Kilo Project Lima Project Oscar Capital investment $167,400 $178,200 $200,850 Annual net income:     Year 1 14,040 18,900 29,700 2 14,040 17,820 24,300 3 14,040 16,740 23,220 4 14,040 12,420 14,580 5 14,040 9,180 13,500 Total $70,200 $75,060 $105,300 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.) (Refer the below table) LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO VIDEO

Solution

a) Project Kilo

Depreciation per year = Capital investment/Useful life

= $167,400/5 yrs = $33,480

Annual Net Income = $14,040

Annual Cash Inflows = Annual Net Income+Annual Depreciation

= $14,040+$33,480 = $47,520

Cash Payback Period = Capital Investment/Annual Cash Inflows

= $167,400/$47,520 = 3.52 years

Project Lima

Depreciation per year = Capital investment/Useful life

= $178,200/5 yrs = $35,640

Calculation of cash inflows for each year (Amounts in $)

Cash Payback Period = 3 years + [($178,200-$160,380)/$48,060]

= 3 yrs + (17,820/48,060) yrs

= 3 yrs + 0.37 yrs = 3.37 years

Project Oscar

Depreciation per year = Capital investment/Useful life

= $200,850/5 yrs = $40,170

Calculation of cash inflows for each year (Amounts in $)

Cash Payback Period = 3 yrs + [($200,850-$197,730)/$54,750] yrs

= 3 yrs + (3,120/54,750) yrs

= 3 yrs + 0.06 yrs = 3.06 years

b) Project Kilo

PV of cash inflows = Annual cash inflows*PVAF(15%, 5 yrs)

= $47,520*3.35216 = $159,295

Net Present Value = PV of cash inflows - Capital Investment

= $159,295 - $167,400 = ($8,105)

Project Lima

Calculation of PV of cash inflows (Amounts in $)

Net Present Value = PV of Cash Inflows - Capital Investment

= $172,052.41 - $178,200 = ($6,147.59)

Project Oscar

Calculation of PV of cash inflows (Amounts in $)

Net Present Value = PV of Cash Inflows - Capital Investment

= $209,172.36 - $200,850 = $8,322.36

c) Project Kilo

Average Annual net income = Total Income of 5 years/5 years

= $70,200/5 yrs = $14,040

Annual rate of return = Avg annual net income/Capital investment

= $14,040/$167,400 = 8.39%

Project Lima

Average Annual net income = Total Income of 5 years/5 years

= $75,060/5 yrs = $15,012

Annual rate of return = Avg annual net income/Capital investment

= $15,012/$178,200 = 8.42%

Project Oscar

Average Annual net income = Total Income of 5 years/5 years

= $105,300/5 yrs = $21,060

Annual rate of return = Avg annual net income/Capital investment

= $21,060/$200,850 = 10.49%

d) Ranking of Projects

Therefore Project Oscar should be selected on the basis of all the three criterias.

Year	Annual Net Income (A)	Annual Depreciation (B)	Annual Cash Inflows (A+B)	Accumulated Cash Inflows
1	18,900	35,640	54,540	54,540
2	17,820	35,640	53,460	108,000
3	16,740	35,640	52,380	160,380
4	12,420	35,640	48,060	208,440
5	9,180	35,640	44,820	253,260