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. Year Investment Proposal Initial Cost Annual Annual and Book Cash Flows Net Income Value $104,700 71,000 $44,600 $10,900 41,100 39,500 9,600 21,300 35,500 15.700 8,500 29,400 16,600 25,600 17,100 - u Awno 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

years	cash flow	cumulative cash flow
1	44600	44600
2	39500	84100
3	35500	119600
4	29400	149000
5	25600	174600
Payback period = 2years+(104700-84100)/(119600-84100)
Payback period = 2years+0.58
payback period = 2.58 years
2) accounting rate of return = average net profit/average investment
average net income = (10900+9600+15700+16600+17100)/5
average net income = 69900/5 = 13980
average investment = 104700/2 = 52350
accounting rate of return = 13980/52350 = 26.70%
3) net present value
years	cash flow	pvf @11%	present value
0	-104700	1	-104700
1	44600	0.900901	40180.18
2	39500	0.811622	32059.07
3	35500	0.731191	25957.28
4	29400	0.658731	19366.69
5	25600	0.593451	15192.35
	Net present value		28055.57

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