Question

Kansas Corporation is reviewing an investment proposal that has an initial cost of $72,000. An estimate of the investment's end-of-year book value, the yearly after-tax net cash inflows, and the yearly net income are presented in the schedule below. Yearly after-tax net cash inflows include savings from the depreciation tax shield. The investment's salvage value at the end of each year is equal to book value, and there will be no salvage value at the end of the investment's life.

Year	Initial Cost and Book Value			Yearly After-Tax Net cash Inflows					Yearly Net Income
1	$	41,500			$	26,500				$	9,000
2		27,500				24,000					10,000
3		17,000				21,500					11,000
4		10,000				19,000					12,000
5		0				16,500					13,000
					$	107,500				$	55,000

Kansas uses a 12% after-tax target rate of return for new investment proposals.

Year	FV of $1 at 12%				FV of an ordinary annuity at 12%				PV of $1 at 12%				PV of an ordinary annuity at 12%
1		1.120				1.000				0.893				0.893
2		1.254				2.120				0.797				1.690
3		1.405				3.374				0.712				2.402
4		1.574				4.779				0.636				3.037
5		1.762				6.353				0.567				3.605
6		1.974				8.115				0.507				4.111

Required:

1. Calculate the project's payback period. (Do not round intermediate calculations.)

2. Calculate the accounting rate of return on the initial investment. (Do not round intermediate calculations. Round your answer to 1 decimal place.)

3. Calculate the proposal's net present value. Round to the nearest dollar. (Do not round intermediate calculations. Round your final answer to nearest dollar amount.)

Answer 1

A. PAYBACK PERIOD IS PERIOD WITHIN WHICH THE INITIAL INVESTMENT.

yearly After-Tax Net cash Inflows					CUMULATIVE CASH FLOW
1	$	26,500							26500[26500]
2		24,000							50500[26500+24000]
3		21,500							72000[50500+21500]
4		19,000							91000[19000+72000]
5		16,500							107500[91000+16500]
		107,500			$	107,500

PAYBACK PERIOD = 3years (cummulative cash flow at end of 3rd year is = initial outlay i.e.72,000$]

B.ACCOUNTING RATE IF RETURN

average net profit /initial investment

= [$55000/5]=$11000

annual rate of return = 11000/72000

=15.3%

C.net present value is difference between initial cost and present value of cash inflow

year	cash flow	pv factor at 12%	present value of cashflow
0	-72000	1	-72000
1	26500	0.893	23664.5
2	24000	0.797	19128
3	21500	0.712	15308
4	19000	0.636	12084
5	16500	0.567	9355.5
		Net Present Value	7540$	[-72000+23664.5+19128+15308+12084+9355.5]