Question

Coronado Corporation is reviewing an investment proposal. The initial cost is $105,800. 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.

Investment Proposal Year Book Value Annual Cash Flows Annual Net Income

1 $69,100 $44,300 $7,600

2 42,900 39,900 13,700

3 20,000 36,000 13,100

4 8,000 29,700 17,700

5 0 24,670 16,670

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

(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 e.g. -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

a)

Year	Cash Flow	Cumulative cash flow
0	-105800	-105800
1	44300	-105800+44300=-61500
2	39900	-61500+39900= -21600
3	36000	-21600+36000= 14400
4	29700	14400+29700= 44100
5	24670	44100+24670= 68770

cash payback period =Year up to which cumulative cash flow is negative+ [Cumulative cash flow of that year /cash flow of immediately next year]

        = 2 + [21600/36000]

        = 2+ .60

       = 2.60 years

b)Total net income over 5 years period = 7600 +13700+13100+17700+16670=68770

Avergae net income per year = 68770/5 = 13754

Average investment=[Beginning book value+ending book value]/2

        = [105800+0]/2

        = 52900

Annual rate of return = Average net income /average investment

                   = 13754 /52900

                    = .26 or 26%

c)

Year	Cash Flow	present value factor at 11%	cash flow *present value factor
1	44300	.90090	39909.87
2	39900	.81162	32383.64
3	36000	.73119	26322.84
4	29700	.65873	19564.28
5	24670	.59345	14640.41
present value of cash flow	132821.04
less:Initial investment	-105800
Net present value	27021.04 (rounded to 27021)

#Find PVF or present value factor from present value table or using the formula 1/(1+i)^n where i =11% ,n=1,2,3,4,5