Question

Exercise 24-11 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. Al 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 savage value at the end of the investment's life. Investment Proposal Initial Cost Annual Cash Flows and Book Annual Net Income $104,300 69,700 41,100 20,900 7.000 $45,000 40,100 34,200 29.200 25.00 $11.400 11.500 14,000 15.300 18.30 Drake Corporation uses an 11% target rate of return for new investment proposals Click here to view table What is the cash payhack period for this proposal? (Round answer to 2 decimal places... 10.50.) Cash payback period

Answer 1

B11 X (a) fax D A B C E F G H year annual cash flows 0 -$ 104,300 $ 46,000 $ 40,100 $ 34,200 $ 29,200 $ 25,300 total = present value present value of cumulative cash annual net factor @ 11% annual cash flows flow income 1.00000 $ 104,300.00 $ 104,300 0.90090 $41,441.40 -$ 58,300 $ 11,400 0.81162 $ 32,545.96 -$ 18,200 $ 11,500 0.73119 $ 25,006.70 $ 16,000 $ 14,000 0.65873 $ 19,234.92 $ 45,200 $ 15,300 0.59345 $ 15,014.29 $ 70,500 $ 18,300 $ 28,943 $ 70,500 5 cash payback period = 2 +($18,200 / $34,200) cash payback period = 2.53 years (b) average investment = $104,300 / 2 = $52,150 average net income = $70,500 / 5 = $ 14,100 annual rate of return = average net income / average investment annual rate of return = $14,100 / $52,150 annual rate of return = 27.04% (c) notrocent value- net present value = $ 28,943

for formulas and calculations, refer to the image below -

B11 в с H year annual cash flows present value factor @ 11% present value of annual cash flows cumulative cash flow annual net income -104300 46000 40100 34200 29200 25300 =ROUND(-PV(11%,B3,0,1),5) =C3*D3 =ROUND(-PV(11%,B4,0,1),5) =C4*D4 =ROUND(-PV(11%,B5,0,1),5) =C5*D5 =ROUND(-PV(11%,B6,0,1),5) =C6*D6 =ROUND(-PV(11%,B7,0,1),5) =C7*D7 =ROUND(-PV(11%,B8,0,1),5) =C8*D8 total = =ROUND(SUM(E3:E8),0) =C3 =F3+C4 =F4+C5 =F5+C6 =F6+C7 =F7+C8 11400 11500 14000 15300 18300 =SUM(G4:68) cash payback period = 2 +($18,200 / $34,200) =ROUND(2+(18200/34200),2) cash payback period = years a average investment = $104,300 / 2 = =104300/2 average net income = $70,500 / 5 = =70500/5 annual rate of return = average net income / average investment annual rate of return = $14,100/$52,150 annual rate of return = =ROUND(14100/52150,4) net present value = =E9

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Answer 2

E25.11 (LO 1, 2, 5) Drake Corporation is reviewing an pvestment proposal. The initial cost is $105,000. 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 book value. There would be no salvage value at the end of the investment's life. Investment Proposal Annual Annual Year Book Value Cash Flows Net Income S70,000 42,000 1 $45,000 S10,000 40,000 12,000 21,000 35,000 14,000 4 7,000 30,000 16,000 5 25,000 18,000 Drake Corporation uses an 11% target rate of return for new investment proposals. Instructions a. What is the cash payback period for this proposal? b. What is the annual rate of return for the investment? c. What is the net present value of the investment?