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 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.

(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

1)
Year	Cash flows	Cumulative Cash flows
0	-1,05,400	-1,05,400
1	45,900	-59,500
2	39,600	-19,900
3	35,100	15,200
4	30,500	45,700
5	24,900	70,600
cash Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=2+(19900/35100)=2.57 years(Approx)

2)
Accounting Rate of Return		26.79%
Average Net Profit	/	Average Investment	Accounting Rate of Return
(70,600/ 5) 14120		105400/2=52700	26.79%

3)

Years		Net cash Inflow	PV Factor11%	Present value
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
Total PV of Inflows				1,34,025
0	Initial Investment			1,05,400
Net Present value on the Project				28,625