Amazon Corporation is considering two longterm 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) 
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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