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Unformatted text preview: P12-1C The Stiller and Meera partnership is considering three long-term capital in- vestment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows. Project Jerry Project Anne Project Ben Capital investment $142,500 $165,000 $195,000 Annual net income: Year 1 $ 9,000 $ 12,500 $ 19,000 2 9,000 12,000 15,000 3 9,000 11,000 14,000 4 9,000 8,000 9,000 5 9,000 6,000 8,000 Total $ 45,000 $ 49,500 $ 65,000 Depreciation is computed by the straight-line method with no salvage value. The com- pany’s cost of capital is 12%. (Assume cash flows occur evenly throughout the year.) 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? P12-2C Aaron Ybarra is an accounting major at a western university located approx- imately 60 miles from a major city. Many of the students attending the university are from the metropolitan area and visit their homes regularly on the weekends. Aaron, an entrepreneur at heart, realizes that few good commuting alternatives are available for students doing weekend travel. He believes that a weekend commuting service could be organized and run profitably from several suburban and downtown shopping mall locations. Aaron has gathered the following investment information. 1. Five used vans would cost a total of $90,000 to purchase and would have a 3-year useful life with negligible salvage value. Aaron plans to use straight-line depreciation. 2. Ten drivers would have to be employed at a total payroll expense of $50,000. 3. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $26,000, Maintenance $4,000, Repairs $6,000, Insurance $4,500, Advertising $2,200....
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This note was uploaded on 02/25/2011 for the course MGMT 1 taught by Professor Bugger during the Fall '10 term at Edison State College.
- Fall '10