Question

Amazon Corporation is considering two long-term capital investment proposals. Relevant data on each project are as follows.

			Project Milo	Project    Otis
	Capital investment		$196,000	$223,000
	Annual net cash flows:
	Year	1	64,644	64,748
		2	55,388	64,748
		3	52,459	64,748
		4	49,686	64,748
		5	47,235	64,748
		Total	$ 269.412	$323,740

Other information: The company’s minimum rate of return is the company’s cost of capital which is 12%. Assume cash flows occur evenly throughout the year.

Instructions:

Compute the following and rank the projects for each category:

a.Compute the cash payback period for each project. (Round your answers to 2 decimal places.)

b.Compute the net present value for each project. Use the appropriate tables from Appendix G. (Round your answers to 0 decimal places.)

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

		SHOW ALL COMPUTATIONS
(a) Cash payback period
Milo
Otis
(b)
		Project Milo		Project Otis
	12% Discount	Cash		Cash
Year	Factor	Inflow	PV	Inflow	PV
1
2
3
4
5
NPV

(c.)	Rank the projects on each of the criteria below. Which project do you recommend?
		Show ranking here
			Net
		Cash	Present
	Project	Payback	Value
	Milo
	Otis
	The project that should be accepted is:
	(and explain why or why not the projects should be accepted)

Answer 1

a)

Milo:

Project Milo
Year	Unrecovered at the Beginning	Investment	Cash Inflow	Unrecovered at the end
1	196,000	196,000	64,644	131,356
2	131,356		55,388	75,968
3	75,968		52,459	23,509
4	23,509		49,686
5	-		47,235

Payback Period

Years before full recovery + (Unrecovered investment at start of the year/Cash flow during the year)

Payback Period	3+23509/49686
Payback Period	3.47 Years

Otis:

Payback Period	Investment/Cash Flow
Cashflow	64,748
Investment	223,000
Payback Period	3.44 Years

b)

		Project Milo		Project Otis
Year	Present Value Factor @12%	Cahflow	Present value	Cahflow	Present value
1	0.893	64,644	57,727	64,748	57,820
2	0.797	55,388	44,144	64,748	51,604
3	0.712	52,459	37,351	64,748	46,101
4	0.636	49,686	31,600	64,748	41,180
5	0.567	47,235	26,782	64,748	36,712
	Present value of Cash Inflows		197,605		233,417

	Project Milo	Project Otis
Present value of inflows	197,605	233,417
Less: Initial Investment	196,000	223,000
Net present value	1,605	10,417

c)

	Payback	NPV
Project Milo	1	2
Project Otis	2	1

Project Otis should be accepted as the NPV of Otis is far more than Milo. And the Payback period is also near to the Project Milo.

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