Financial Problem: Net Present Value and Ranking Projects

Please help with following assignment:

See attached file for proper format.

1 The partnership of Lou and Bud is considering three long-term capital investment proposals. Relevant data on each project are as follows.

Project
Brown Red Yellow
$200,000 $225,000 $250,000

Capital investment
Annual net income
Year 1 25,000 20,000 26,000
2 16,000 20,000 24,000
3 13,000 20,000 23,000
4 10,000 20,000 22,000
5 8,000 20,000 20,000
________ ________ _________
Total $ 72,000 $ 100,000 $ 115,000
======= ======= =======

Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company's required rate of return is the company's cost of capital which is 12%. (Assume that 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. What project do you recommend?

2 Jo Quick is managing director of the Tot Lot Day Care Center. Tot Lot is currently set up as a full-time child care facility for children between the ages of 12 months and 6 years. Jo Quick is trying to determine whether the center should expand its facilities to incorporate a newborn care room for infants between the ages of 6 weeks and 12 months. The necessary space already exists. An investment of $20,000 would be needed, however, to purchase cribs, high chairs, etc. The equipment purchased for the room would have a 5 year useful life with zero salvage value.

The newborn nursery would be staffed to handle 11 infants on a full-time basis. The parents of each infant would be charged $125 weekly, and the facility would operate 52 weeks of the year. Staffing the nursery would require two full-time specialist and five part-time assistants at an annual cost of $60,000. Food, diapers, and other miscellaneous supplies are expected to total $6,000 annually.

Instructions
(a) Determine the annual net income and the net income cash flows for the nursery.
(b) Compute the cash payback period for the new nursery and the annual rate of return. (Round to two decimals.)
(c) Compute the net present value of incorporating a newborn care room. (Round to the nearest dollar.) Tot Lot's cost of capital is 10%.
(d) What should Jo Quick conclude from these computations?