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		$174,400		$190,750		$214,000
Annual net income:
Year  1		15,260		19,620		29,430
2		15,260		18,530		25,070
3		15,260		17,440		22,890
4		15,260		13,080		14,170
5		15,260		9,810		13,080
Total		$76,300		$78,480		$104,640

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.)

Compute the net present value for each project. (Round answers to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

		Project Bono		Project Edge		Project Clayton
Net present value		(6323.20)		(7970.46)		?????

Answer 1

Solution..  

Answer.. NPV = $3674

Calculation of net cash inflow from the project Clayton

Particulars	Year 1	Year. 2	year 3	year 4	year 5
Annul net income	$29430	$25070	$22890	$14170	$13080
Add. Depreciation	$42800	$42800	$42800	$42800	$42800
Net annual cash flow	$72230	$67870	$65690	$56970	$55880

Calculation of NPV of the project Clayton

Year	Net cash inflow	Dis. factor @15%	Discounted cash flow
1	$72230	0.86956	$62808.3188
2	$67870	0.75614	$51319.2218
3.	$65690	0.65751	$43191.8319
4.	$56970	0.57175	$32572.5975
5.	$55880	0.49717	$27781.8596
			$217,673.8296

Present value of all future cash inflows $217,673.8296

Initial investments $214,0000

Net Present Value $3673.8296