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Savanna Company is considering two capital investment proposals. Relevant data on each project are as...

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Accounting

Savanna Company is considering two capital investment proposals. Relevant data on each project are as follows:

Project Red Project Blue

Capital investment $462,000 $662,000

Annual net income 32,000 67,000

Estimated useful life 8 years 8 years

Depreciation is computed by the straight-line method with no salvage value. Savanna requires an 8% rate of return on all new investments. The present value of 1 for 8 periods at 8% is .54027 and the present value of an annuity of 1 for 8 periods is 5.74664.

Instructions

(a) Compute the cash payback period for each project.

(b) Compute the net present value for each project.

(c) Compute the annual rate of return for each project.

(d) Which project should Savanna select?

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