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 $104,400 1 70,500 $45,200 $11,300 2 43,000 40,500 13,000 3 21,900 35,300 14,200 4 7,400 30,400 15,900 5 0 25,400 18,000 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.) Cash payback period 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 % (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 $

Answer #1

payback period: | |||||

Year | cash flows | Cumulative Casah flows | |||

0 | -104400 | -104400 | |||

1 | 45200 | -59200 | |||

2 | 40500 | -18700 | |||

3 | 35300 | 16600 | |||

4 | 30400 | 47000 | |||

5 | 25400 | 72400 | |||

Payback period: 2 years + ( 18700+35300) = 2.53 years | |||||

Annual rate of return: | |||||

Average profits: (11300+13000+14200+15900+18000)5 = 14480 | |||||

Average investment: 104400 /2 = 52200 | |||||

Annual rate of return: 14480 /52200 *100 =27.74% | |||||

Net present value: | |||||

Year | Cash flows | PVF @ 11% | Present value | ||

0 | -104400 | 1 | -104400 | ||

1 | 45200 | 0.900901 | 40720.72 | ||

2 | 40500 | 0.811622 | 32870.71 | ||

3 | 35300 | 0.731191 | 25811.06 | ||

4 | 30400 | 0.658731 | 20025.42 | ||

5 | 25400 | 0.593451 | 15073.66 | ||

Net present value: | 30102 |

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