ACCT 406 Compute annual rate of return, cash payback, and net present value

Question

P12-1A – Compute annual rate of return, cash payback, and net present value
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse
Problem P12-1A Henkel 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 Kilo
Capital investment:
\$150,000
Salvage value:
\$0
Annual net income:
Year:
1
14,000
2
14,000
3
14,000
4
14,000
5
14,000
Total:
\$70,000

Project Lima
\$165,000
\$0

Project Oscar
\$200,000
\$0

18,000
17,000
16,000
12,000
9,000
\$72,000

27,000
23,000
21,000
13,000
12,000
\$96,000

Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is:
(Assume that cash flows occur evenly throughout the year.)

15%

Instructions:
(a) Compute the cash payback period for each project. (Round to two decimals.)
Project Kilo
Depreciation per year = Area for formula
Cash payback period = Area for formula
Project Lima
Depreciation =

Project Oscar
Depreciation =

Area for formula

Year
1
2
3
4
5

Annual
Cumulative
Depreciation
Cash
Cash
Value:
Inflow:
Inflow:
Amount
Amount
Formula
Amount
Amount
Formula
Amount
Amount
Formula
Amount
Amount
Formula
Amount
Amount
Formula

Area for formula
Area for formula
Area for formula

Area for formula

Year
1
2
3
4
5
Area for formula
Area for formula
Area for formula

Annual
Depreciation
Cash
Value:
Inflow:
Amount
Amount
Amount
Amount
Amount
Amount
Amount
Amount
Amount
Amount

Cumulative
Cash
Inflow:
Formula
Formula
Formula
Formula
Formula

Name: Solution
Course:
Date:
(b) Compute the net present value for each project. (Round to nearest dollar.)

Year
1
2
3
4
5
Total

Discount
Factor

Project Kilo
Cash
Inflow
PV

Formula
Formula
Formula
Formula
Formula

Amount
Amount
Amount
Amount
Amount
Formula
Capital investment:
Positive (negative) net present value:

Project Lima
Cash
Inflow
PV

Formula
Formula
Formula
Formula
Formula
Formula
Amount
Formula

Amount
Amount
Amount
Amount
Amount
Formula

Formula
Formula
Formula
Formula
Formula
Formula
Amount
Formula

Project Oscar
Cash
Inflow
PV
Amount
Amount
Amount
Amount
Amount
Formula

Formula
Formula
Formula
Formula
Formula
Formula
Amount
Formula

(c) Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your
computation.)
Project Kilo Formula or percentage as desired.
Project Lima Formula or percentage as desired.
Project Oscar Formula or percentage as desired.

(d) Rank the projects on each of the foregoing bases. Which project would you recommend?

Project
Project Kilo
Project Lima
Project Oscar

Cash Payback
Number
Number
Number

Net
Present
Value
Number
Number
Number

Annual
Rate of
Return
Number
Number
Number