Question

Drake Corporation is reviewing an investment proposal. The initial cost is $105,000. 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 assumed to equal its book value. There would be no salvage value at the end of the investment's life.

*Calculate payback, annual rate of return, and net present
value*.

Investment Proposal | ||||||

Year | Book Value | Annual Cash Flows |
Annual Net Income |
|||

1 | $70,000 | $45,000 | $10,000 | |||

2 | 42,000 | 40,000 | 12,000 | |||

3 | 21,000 | 35,000 | 14,000 | |||

4 | 7,000 | 30,000 | 16,000 | |||

5 | 0 | 25,000 | 18,000 |

Drake Corporation uses an 11% target rate of return for new investment proposals.

Instructions

**a.** What is the cash payback period for this
proposal?

**b.** What is the annual rate of return for the
investment?

**c.** What is the net present value of the
investment?

Answer #1

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...

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...

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...

Kansas Corporation is reviewing an investment proposal that has
an initial cost of $78,000. An estimate of the investment's
end-of-year book value, the yearly after-tax net cash inflows, and
the yearly net income are presented in the schedule below. Yearly
after-tax net cash inflows include savings from the depreciation
tax shield. The investment's salvage value at the end of each year
is equal to book value, and there will be no salvage value at the
end of the investment's life....

Porter is deciding on an investment proposal. Look at the chart
below to calculate the problems 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
$105,800
1
69,800
$46,000...

erkins Corporation is considering several investment proposals,
as shown below:
Investment Proposal
A
B
C
D
Investment required
$
140,000
$
175,000
$
105,000
$
131,250
Present value of future net cash flows
$
168,000
$
262,500
$
147,000
$
300,000
If the project profitability index is used, the ranking of the
projects from most to least profitable would be:

#29
Redwood Corporation is considering two alternative investment
proposals with the following data:
Proposal X
Proposal Y
Investment
$ $830,000
$ $534,000
Useful life
7 years
7 years
Estimated annual net
cash inflows for
77
years
$ $120,000
$ $84,000
Residual value
$ $31,000
$
Depreciation method
Straight−line
Straight−line
Required rate of return
10%
7%
How long is the payback period for Proposal Y?
#31
Selected financial data for The Portland Porcelain Works Coffee
Mug Division is as follows:
Sales...

OldSchool Corp. is reviewing its method of evaluating capital
expenditure proposals using the accounting rate of return method. A
recent proposal involved a $200,000 investment in a machine that
had an estimated useful life of five years and an estimated salvage
value of $20,000. The cash flow from the new machine was expected
to increase net income before depreciation expense by $56,000 per
year. OldSchool’s current policy for approving a new investment is
that it have a rate of return...

Perkins Corporation is considering several investment proposals,
as shown below:
Investment Proposal
A
B
C
D
Investment
required
$
104,000
$
130,000
$
78,000
$
97,500
Present value of
future net cash flows
$
124,800
$
195,000
$
109,200
$
192,000
If the project profitability index is used, the ranking of the
projects from most to least profitable would be:

Preference Ranking
Information on four investment proposals is given below:
Investment
Proposal
A
B
C
D
Investment
required
$(85,000)
$(200,000)
$(90,000) $(170,000)
Present value of cash flows
119,000
250,000
135,000
221,000
Net present
value
$34,000
$50,000
$45,000
$51,000
Life of the
project
5 years
7 years 6
years
6 years
Required:
Compute the project profitability index for each investment
proposal.
Rank the proposals in terms of preference.

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