I have having trouble with this problem. Can anyone help me? I have included the

Question

I have having trouble with this problem. Can anyone help me? I have included the reference tables that we are required to use. FYI, I am using the textbook: Kimmel, Accounting: Tools for Decision Making, 5e. This is problem from Chapter 24 Planning Capital Investments. It is Exercise 24-11A. Please note the text in red.

Exercise 24-11 (part level submission) 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 Investment Proposal Initial Cost Annual Cash Flows Annual Net Income and Book Tear Value $104,820 70,790 42,520 21,800 8,670 $44,000 40,600 35,200 29,600 25,700 $9,970 12,330 14,480 16,470 17,030 4 BAP Corporation uses a 12% target rate of return for new investment proposals view the factor table (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period ears

Explanation / Answer

Cash payback period is the period within which the initial investment is expected to be recovered by the company with the use of cash flows in subsequent years.

__________

Solution:

Here, the initial investment of $104,820 will get recovered as follows:

Cash Flow Year 1 = $44,000

Cash Flow Year 2 = $40,600

and the balance amount of $20,220 (104,820 - 44,000 - 40,600) between year 2 and year 3. The payback period can be calculated with the use of following formula:

Cash Payback Period = Years upto which Partial Recovery is Made + Balance/Cash Flow of the Year in which Full Recovery is Made

Cash Payback Period = 2 + 20,220/35,200 = 2.57 Years (answer)

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