Reference no: EM132593736

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                      $160,000                  $175,000                 $200,000

Annual net income:

Year 1                                             14,000                  18,000                    27,000

2                                                   14,000                    17,000                     23,000

3                                                   14,000                     16,000                      21,000

4                                                    14,000                     12,000                    13,000

5                                                      14,000                      9,000                      12,000

Total                                               $ 70,000                         $ 72,000              $ 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:

Question a. Compute the cash payback period for each project. (Round to two decimals).

Question b. Compute the net present value for each project. (Round to nearest dollar).

Question c. Compute the annual rate of return for each project. (Round to two decimals) (Hint: Use average annual net income in your computation).

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