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		$104,500
1		69,900			$46,000			$11,400
2		41,000			40,600			11,700
3		21,000			34,800			14,800
4		7,600			31,000			17,600
5		0			24,600			17,000

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

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ANS: Amovat in $ (a) Cash payback percied : 2.51 yeares. Workings Year cash-flow (104500) Cumulative cash-flow (104500) (58500) 46000 40600 34.800 (17900) 16900 47900 72500 31000 24600 Payback period = 2 year +(1.7900 1. 34800) = 2.51 years (b) Annual rate of return for the lovestments 13.88 / Worwings_Annual Rack of_retin

Average Nest Income Initial Investment to Average Ner Income = ( 11400411700 +14800.417600417000) = $14500 # Initial Investment = $ 104 500 Hence ARR =_14500 x100 = 13.88% 104500 (C) Ner present Value : $ 30358 · Workings: lyear I cash-flow 1 pv faciton @ 11% (104500) 46000 0-90090 40600 0.81162 34800 0.73119 31000 0.65873 24600 0.59345 WPV : present value $ (104500) $ 41,441 $ 32952 $ 25445 $ 20421 $ 14599 $30,358

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