The Three Stooges partnership 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 Moe

Project Larry

Project Curly

Capital investment

150,000

160,000

200,000

Annual net income:

Year 1

13,000

18,000

27,000

Year 2

13,000

17,000

22,000

Year 3

13,000

16,000

21,000

Year 4

13,000

12,000

13,000

Year 5

13,000

9,000

12,000

Total

$65,000

$72,000

$95,000

Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 15%. (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. Which project do you recommend?