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 $105,900
1 69,300 $45,700 $9,100
2 41,600 40,400 12,700
3 21,300 35,800 15,500
4 8,200 31,000 17,900
5 0 25,300 17,100
Drake Corporation uses an 11% target rate of return for new investment proposals.
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(a) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period Entry field with correct answer 2.55 years
(b) What is the annual rate of return for the investment? (Round answer to 2 decimal places, e.g. 10.50.) Annual rate of return for the investment Entry field with incorrect answer 13.65 %
(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.)
Net present value $Entry field with correct answer 29672
I tried figuring out What is the annual rate of return for the investment?
Annual rate of return for investments this is where i'm having an issue....... i already have tried 29.35 and 35.23 help, i have the other 2 answers!
Solution (a):
| Computation of Cumulative Cash Inflows | ||
| Period | Annual Cash Inflows | Cumulative Cash Inflows |
| 1 | 45,700.00 | 45,700.00 |
| 2 | 40,400.00 | 86,100.00 |
| 3 | 35,800.00 | 121,900.00 |
| 4 | 31,000.00 | 152,900.00 |
| 5 | 25,300.00 | 178,200.00 |
cash Payback period = 2 + ($105,900-$86100) / 35800 = 2.55 years
Solution b):
Annual rate of Return = Annual average income / average investment
Annual average Income = ($9100+$12700 +$15500 + $17900+ $17100) / 5 = $14,460
Average Investment = (Initial Investment + salvage value) / 2 = ($105900 + $0) / 2 = $52,950
Average Rate of return = $14460 / $52950 = 27.31%
Solution c):
| Computation of NPV | ||||
| Particulars | Period | PV Factor | Amount | Present Value |
| Cash outflows: | ||||
| Initial investment | 0 | 1 | $105,900.00 | $105,900 |
| Present Value of Cash outflows (A) | $105,900 | |||
| Annual Cash inflows: | ||||
| Year 1 | 1 | 0.90090 | 45,700.00 | $41,171 |
| Year 2 | 2 | 0.81162 | 40,400.00 | $32,790 |
| Year 3 | 3 | 0.73119 | 35,800.00 | $26,177 |
| Year 4 | 4 | 0.65873 | 31,000.00 | $20,421 |
| Year 5 | 5 | 0.59345 | 25,300.00 | $15,014 |
| Present Value of Cash Inflows (B) | $135,572 | |||
| Net Present Value (NPV) (B-A) | $29,672 | |||
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