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 flow	annual net income
0	105,000
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.

(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?

(a) Cash payback period is:

(b-1) Average Investment is:

(b-2) Annual Rate of Return is:

Year #	Discount Factor 11%	Amount	Present Value
1	0.90090	$ 45,000	$
2
3
4
5
Total Present value cash inflows
Less: ??
Net Present Value			$

Answer 1

A) Calculation of cash payback period

Payback Period = Year immediately preceding the full recovery +(Unrecovered cost at beginning of the year in which full recovery is made/Cash flow in the year)

=2+((105000-85000)/35000)

=2.57 years

B) Calulation of annual rate of return

C) Calculation of NPV

(You may enter 105,000 as Less: Present value of cash outflows in the answer format given in the question)

In case of any questions on the above workings, please share the same in the comments section.

All the best!