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Gi CbloradoState University
Show You Problem 1
Module 14, Chapter 18 Handout Planning for Capital Investments
Sam and Ella's Chicken Grill is considering three long-term capital investment proposals. Eath. • investment has a useful life of 5 years. Relevant data on each project are as follows:
Project Project^ Prqject^ I
Zen Synergy^ Command^ •
Capital
investment $192,000 $210,000^ $240,
Annual~t (^). (^) w~w.
income: NI ... e>G f'J\ ...-^ ~-::vr^ ,J^ ,·^ ....^ 'W::cf
Year (^1) 16,800 ..-'1i"4:P ::S'S"').o~ 21,600 +-^ '¼l.^ ~^ !:^ Co)'^ ,t>O^ 32,400 .-ec \%'£.: 2 16,800 ,^ It^ 20,400^ " ·::^ Jo^ "2-1^ i.t,ve^ 27,600 ....^ ~
3 16,800 \I^ I^ 19,200 \ I^ -:.^ (.^ \ ^ 't,o't>^ 25,200 \l - -
,.
4 16,800 \ 14,400 "'^ ::^ ~le>^ ,^ ',00^15 I 600 q -:
5 16,800 "^ " 10,800^ ,.^ ::^ ~-z.\ttso -^ 14,4QQ (^) '' -::.
Total $84,000 $86,400 $115,
Depreciation is computed by the~traight-line method with rio sal~age ~alue. The company's cost of
capital is 16%. (Assume that cash flows occur evenly throughout the year.} Instructions
- Compute the cash payback period for each project. (Round ·to two decimals.) ~MN
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&^ Colorado^ State^ University^ PlanningModule14,forChapterCapitalInvestments^18 Handout
2. Compute thenetpresentvaluef,,Qreachproject.(Roundtonearestdollar.)^ I'S'"/,
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- Computetheannual^ rateofreturnforeachproject.(Roundtotwodecimals.)^ (Hint:^ Use^ average .annualnet incomeinyour computation.) PcW_fl...~ArJ.~ -JM,~~rJ4·iN'~, ~rJ i^ H~,&OQ.^ :;^ t,,S'I
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- Rankthe^ projects^ on^ eachof^ the^ foregoing^ bases.^ Whichpf9ject^ do^ you^ recommend?
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(, CbloradoS'tate University
Co~ch You Problem 1
Module 14, Chapter 18 Handout
Planning for Capital Investments
Just Falafs Corporation is reviewing an investment proposal. The jnitjal cost js $131,250. Estimates of the
book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the following schedule. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is assumed to equal its book value. There would be no salvage value at the end of the investment's life. Investment Proposal Annual Annual Year Book Value Cash Flows Net Income
1 $87,500^ $56,250^ $12,
3 26,250^ 43,750^ 17,
4 8,750^ 37,500^ 20,
Just Falafs Corporation uses an 11% tam.et rate of return for new inve~tment proposals. Instructions
- VVhat is the cash payback period fqrthis proposal? brr'rl 11 AA. ~ {iVIII\ CK ~i~~ ~~^ - 1..'S°'O^ - ::f~~~
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- VVhat is the annual rate of return for the investment?
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- VVhat is the net present value of the investment?
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