Question:
Sadler Corporation 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 Ric
|
Project Rac
|
Project Roe
|
|
Capital investment
|
$140,000
|
$150,000
|
$180,000
|
|
Annual net income:
|
|
|
|
|
Year 1
|
13,000
|
18,000
|
27,000
|
|
2
|
13,000
|
17,000
|
22,000
|
|
3
|
13,000
|
13,000
|
16,000
|
|
4
|
13,000
|
12,000
|
13,000
|
|
5
|
13,000
|
9,000
|
12,000
|
|
Total
|
$65,000
|
$69,000
|
$90,000
|
Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 15%.
Instructions
(a) Compute the annual rate of return for each project. (Round to one decimal.)
(b) Compute the cash payback period for each project. (Round to two decimals.)
(c) Compute the net present value for each project. (Round to nearest dollar.)
(d) Rank the projects on each of the foregoing bases. Which project do you recommend?