Question

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 $168,000 $183,750 $202,000 Annual net income: Year 1 14,700 18,900 28,350 2 14,700 17,850 24,150 3 14,700 16,800 22,050 4 14,700 12,600 13,650 5 14,700 9,450 12,600 Total $73,500 $75,600 $100,800 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.) Click here to view PV table. Collapse question part (a) 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

Answer 1

(a) Compute the cash payback period for each project.

Years	Project Bono		Project edge		Project Clayton
	Cash flow	Cumulative cash flow	Cash flow	Cumulative cash flow	Cash flow	Cumulative cash flow
1	48300	48300	55650	55650	68750	68750
2	48300	96600	54600	110250	64550	133300
3	48300	144900	53550	163800	62450	195750
4	48300	193200	49350	213150	54050	249800
5	48300	241500	46200	259350	53000	302800

Cash payback period

Project Bono = 3 years+23100/48300 = 3.48 years

Project edge = 3 years+19950/49350 = 3.40 years

Project clayton = 3 years+6250/54050 = 3.12 years