Question

ses/35333/assignments/3691185?module_item_id=11817967 Drake Corporation is reviewing an investment proposal. The initial cost is $106,000. 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. Investment Proposal Book Annual Annual Year Value Cash Flows Net Income 1 $69,300 $44,100 $7,400 2 42,600 40,300 13,600 3 20,000 36,000 13,400 4 6,500 29,800 16,300 50 24,700 18,200 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

Answer 1

Solution a:

Computation of cumulative cash flows
Year	Cash Flows	Cumulative cash flows
1	$44,100.00	$44,100.00
2	$40,300.00	$84,400.00
3	$36,000.00	$120,400.00
4	$29,800.00	$150,200.00
5	$24,700.00	$174,900.00

Cash payback period = 2 years + ($106,000 - $84,400) / $36,000 = 2.60 years

Solution b:

Average annual income = ($7,400 + $13,600 + $13,400 + $16,300 + $18,200) / 5 = $13,780

Average investment = (cost + salvage value) /2 = ($106,000 + 0) / 2 = $53,000

Annual rate of return for the investment = $13,780 / $53,000 = 26%

Solution c:

Computation of NPV - Drake Corporation
Particulars	Period	Amount	PV Factor (11%)	Present Value
Cash outflows:
Initial investment	0	$106,000	1	$106,000
Present value of cash outflows (A)				$106,000
Cash Inflows:
Annual cash inflows:
Year 1	1	$44,100	0.90090	$39,730
Year 2	2	$40,300	0.81162	$32,708
Year 3	3	$36,000	0.73119	$26,323
Year 4	4	$29,800	0.65873	$19,630
Year 5	5	$24,700	0.59345	$14,658
Present value of cash inflow (B)				$133,049
NPV (B-A)				$27,049