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