Question

e12.11

t Drake Corporation is reviewing an investment proposal The initial cost is $107,100. 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 assumed to equal its bookvalue. There would be no salvage value at the end of the Annual Year Book Value Cash Flows Net Income $7.900 12,800 14800 17.600 16,515 1 $69,100 $5.900 39,600 36,000 30,500 24.715 2 42,300 3 21100 4 8.200 Drake Corporation uses an 11% target rate of return for new investment proposals. Click here to view PV table What is the cash payback period for this proposal2 (Round answer to 2 decimal places, eg. 10.50.) Cash payback period years what is the annual rate of return for the investment? (Round answer to 2 decimal places, eg 10.50%) Annual rate of return for the investment What is the net present value of the investment? (If the net present value is negative, use either a negative sign preceding the numbereg.-45 or parentheses eg (45). Round answer to O decimal places, eg. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided. Net present value

Answer 1

(a) Cash Payback Period:- Annual Cumulative Year Cashflows Cashflows (107,100) (107,100) (61,200) (21,600) 14,400 44,900 69,615 45,900 39,600 36,000 30,500 24,715 Time required in the 3rd vear to recover the balance amount of S 21,600 That is - (Balance Amount/Cashflow in 3rd year) Cash payback is -2 years (21600/36000) Cash payback is -2.60 years Approx. b) Annual Rate of Return: Annual Rate of Return is-(Average annual net income/Initial Investment) Average Annual Net Income is Total Net Income/Life of Investment) Average Annual Net Income is (7900 12800+14800+17600+16515)/5 Average Annual Net Income is S 13,923/ Annual Rate of Return is-(13923/107100) 100 Annual Rate of Return is-13.00% Approx C) Net Present Value: Annual Cashflows Present Year PVF @11% 1.0000 0.9009 0.8116 0.7312 0.6587 0.5935 Net Present Value Value S (107,100) 45,900 39,600 36,000 30,500 24,715 (107,100) 41,351 32,140 26,323 20,091 14,667 27,473 Net Present Value is S 27,473/.

Answer 2

For B, you have to divide 107,100 from the paragraph by 2 which will be 53,550. Then you divide 13,923 by 53550 which will get you .26 aka 26% for B.