Question

Exercise 24-11

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 $105,400
1 69,100 $45,900 $9,600
2 42,300 39,600 12,800
3 21,100 35,100 13,900
4 8,200 30,500 17,600
5 0 24,900 16,700

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

Year	Book value	Net Cash Flow	Cumulative cash flow		Net Income
0	105000		-105000
1	69100	$45,900	($59,100)		$9,600
2	42300	39600	($19,500)		12800
3	21100	35100	$15,600		13900
4	8200	30500	$46,100		17600
5	0	24900	$71,000		16700
Total		$131,250			$70,600
No of years	5
Average Rate Total/5	14120
70600/5
Annual Rate of Return
Average Profit/Average investment
14120/((105000+0)/2)*100	26.90	%
ans 2 Payback period
2 years+(19500/35100)	2.56	years
ans NPV
Present value of net cash flow	$134,025
Amount to be invested	105000
Net present value	$29,025
working
Year	Net Cash Flow	Discount factor 12%	Discounted cash flow
1	$45,900	0.90090	$41,351
2	$39,600	0.81162	$32,140
3	$35,100	0.73119	$25,665
4	$30,500	0.65873	$20,091
5	$24,900	0.59345	$14,777
	$176,000		$134,025
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