Question

Drake Corporation is reviewing an investment proposal. The initial cost and estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its book value. There would be no salvage value at the end of the investment’s life. Investment Proposal Year Initial Cost and Book Value Annual Cash Flows Annual Net Income 0 $104,100 1 69,500 $45,200 $10,600 2 41,700 39,400 11,600 3 20,800 35,300 14,400 4 6,400 29,000 14,600 5 0 24,500 18,100 Drake Corporation uses an 11% target rate of return for new investment proposals. Click here to view PV table.

(a) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.)

(b) What is the annual rate of return for the investment? (Round answer to 2 decimal places, e.g. 10.50.)

(c) What is the net present value of the investment? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Answer 1

Payback period:
Year	Cashflows	Cumulative CF
0	-104100	-104100
1	45200	-58900
2	39400	-19500
3	35300	15800
4	29000	44800
5	24500	69300
Payback period = 2 years + 19500/35300 = 2.55 years
Annual rate of return::
Total net incomes			69300
(10600+11600+14400+14600+18100)
Divide: yEars			5
Average annual inccome			13860
Divide:A verage investment			52050
Annual rate of return::			26.63%
NPV:
Year	CFs	PVF at 11%	Present value
0	-104100	1	-104100
1	45200	0.900901	40720.72
2	39400	0.811622	31977.92
3	35300	0.731191	25811.06
4	29000	0.658731	19103.2
5	24500	0.593451	14539.56
NPV:			28052