BAP Corporation is reviewing an investment proposal. The initial cost and estima
ID: 2473505 • 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.
and Book Value Annual
Cash Flows Annual
Net Income 0 $105,240 1 69,810 $44,700 $9,270 2 41,100 40,800 12,090 3 20,220 35,200 14,320 4 6,470 29,200 15,450 5 0 24,200 17,730
Explanation / Answer
CASH PAYBACK PERIOD
YEAR CASH FLOW CUMULATIVE CASH FLOW
1 44700 44700
2 40800 85500
3 35200 120700
PAYBACK PERIOD = 2 + 19740/35200
= 2 + 0.561
= 2.561 YEARS
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