Depreciation is computed by the straight-line method with

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Henkel Corporation is considering two long-term capital investment proposals. Relevant data on each project are as follows.




Project





Brown

Red   



 

Capital investment

$249,400

$189,610



Annual net income:





Year

1

26,152

25,425




2

24,312

16,323




3

23,239

13,021




4

17,104

10,067




5

20,093

8,472




Total

$ 110,900

$73,308









Depreciation is computed by the straight-line method with no salvage value. The company's minimum rate of return is the company's cost of capital which is 12%. Assume cash flows occur evenly throughout the year

Instructions:

Compute the following and rank the projects for each category:

  1. Compute the average annual rate of return for each project. (Round your answers to 1 decimal place.)
  2. Compute the cash payback period for each project. (Round your answers to 2 decimal places.)
  3. Compute the net present value for each project. (Round your answers to 0 decimal places.)
  4. Rank the projects on each of the foregoing bases. Which project do you recommend and WHY?

Reference no: EM13583056

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