a. Cash payback period
Year | Cash Flows | Cumulative cash flow |
0 | -105000 | -105000 |
1 | 45000 | -60000 |
2 | 40000 | -20000 |
3 | 35000 | 15000 |
4 | 30000 | 45000 |
5 | 25000 | 70000 |
As seen from above table, cash payback period will lie between year 2 and 3.
Cash payback period = 2 + (20000 / 35000) = 2.57 years
b-1. Average investment = ( Book Value of investment at beginning + Book Value of investment at end ) / 2
= (105000 + 0 ) / 2
= $ 52 500
b-2. Annual rate of return = Average Annual Net Income / Average Investment
Average Annual Net Income = Total Annual Net Income / No of years
= (10000 + 12000 + 14000 + 16000 + 18000) / 5
= 70000 / 5 = $ 14,000
Annual rate of return = 14000 / 52500 = 0.2667 or 26.67%
c. Net Cash Flows
Year | Discount Factor 11% | Cash Flows | Present Value |
1 | 0.901 | 45000 | 40541 |
2 | 0.812 | 40000 | 32465 |
3 | 0.731 | 35000 | 25592 |
4 | 0.659 | 30000 | 19762 |
5 | 0.593 | 25000 | 14836 |
Total PV cash inflows | 133195 | ||
Less: Initial Investment | -105000 | ||
NPV | 28195 |
Drake Corporation is reviewing an investment proposal. The initial cost and estimates of the book value...
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