The Three Stooges partnership 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 Moe Project Larry Project Curly
Capital investment $150,000 $160,000 $200,000
Annual net income:
Year 1 13,000 18,000 27,000
2 13,000 17,000 22,000
3 13,000 16,000 21,000
4 13,000 12,000 13,000
5 13,000 9,000 12,000
Total $ 65,000 $ 72,000 $ 95,000
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.)
Hint:
Compute annual rate of return, cash payback, and net present value.
Instructions
(a) Compute the cash payback period for each project. (Round to two decimals.)
(b) Compute the net present value for each project. (Round to nearest dollar.)
(c) Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.)
(d) Rank the projects on each of the foregoing bases. Which project do you recommend?