BAP Corporation is reviewing an investment proposal. The initial cost and estima
ID: 2467581 • Letter: B
Question
BAP 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. 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 equal to its book value. There would be no salvage value at the end of the investment’s life.
BAP Corporation uses a 12% target rate of return for new investment proposals.
A.) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.)
B.) What is the annual rate of return for the investment? (Round answer to 2 decimal places, e.g. 10.50.)
C.) What is the net present value of the investment? (Round answer to 0 decimal places, e.g. 125.)
Investment Proposal Year Initial Costand Book Value Annual
Cash Flows Annual
Net Income 0 $104,700 1 69,610 $44,500 $9,410 2 42,720 40,500 13,610 3 20,240 34,200 11,720 4 8,700 29,900 18,360 5 0 25,900 17,200
Explanation / Answer
A. Computation of Pay back period
Year Cash flows Cummulative cash flows
1 44500 44500
2 40500 85000
3 34200 119200
4 29900 149100
5 25900 175000
Pay back period = 2 + 19700 / 34200
= 2 + 0.58 = 2.58 years
B. Annual rate of return = Average income / original investment * 100
Year Net income
1 9410
2 13610
3 11720
4 18360
5 17200
Average income = 9410 + 13610+11720+18360+17200 / 5
= 14060.
ARR = 14060 / 104700 * 100 = 13.43%
C. Computation Net Present Value
Year Cash flows Discount@12% PVCF
1 44500 0.893 39738.5
2 40500 0.797 32278.5
3 34200 0.712 24350.4
4 29900 0.636 19016.4
5 25900 0.567 14685.3
130069.1
less: initial investment ( 104700)
NPV 25369.1.
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