Solution a:
Computation of cumulative cash flows | ||
Year | Cash Flows | Cumulative cash flows |
1 | $45,000.00 | $45,000.00 |
2 | $40,000.00 | $85,000.00 |
3 | $35,000.00 | $120,000.00 |
4 | $30,000.00 | $150,000.00 |
5 | $25,000.00 | $175,000.00 |
Payback period = 2 years + ($105,000 - $85,000) / $35,000 = 2.57 years
Solution b:
Average investment = (Cost + Salvage value) / 2 = ($105,000 + 0) / 2 = $52,500
Average annual income = ($10,000 + $12,000 + $14,000 + $16,000 + $18,000) / 5 = $14,000
Annual rate of return = Average annual income / Average investment = $14,000 / $52,500 = 26.67%
Solution c:
Computation of NPV - Drake Company | ||||
Particulars | Amount | Period | PV Factor | Present Value |
Cash Outflows: | ||||
Initial investment | $105,000.00 | 0 | 1 | $105,000 |
Present Value of Cash Outflows (A) | $105,000 | |||
Cash Inflows: | ||||
Year 1 | $45,000.00 | 1 | 0.90090 | $40,541 |
Year 2 | $40,000.00 | 2 | 0.81162 | $32,465 |
Year 3 | $35,000.00 | 3 | 0.73119 | $25,592 |
Year 4 | $30,000.00 | 4 | 0.65873 | $19,762 |
Year 5 | $25,000.00 | 5 | 0.59345 | $14,836 |
Present Value of Cash Inflows (B) | $133,195 | |||
Net Present Value (B-A) | $28,195 |
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