*Exercise 26-11 *Exercise 26-11 Drake Corporation is reviewing an investment pro
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Question
*Exercise 26-11
*Exercise 26-11
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. 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 Year Initial Cost
and Book Value Annual
Cash Flows Annual
Net Income 0 $105,400 1 69,100 $45,900 $9,600 2 42,300 39,600 12,800 3 21,100 35,100 13,900 4 8,200 30,500 17,600 5 0 24,900 16,700
Drake Corporation uses an 11% target rate of return for new investment proposals.
Click here to view PV table.
(a)
What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.)
Cash payback period years
(b)
What is the annual rate of return for the investment? (Round answer to 2 decimal places, e.g. 10.50.)
Annual rate of return for the investment %
(c)
What is the net present value of the investment? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Net present value $
Explanation / Answer
a) cummulative cash flow up to year 2 =-105400+45900+39600=-19900
cummulative cash flow up to year 3= -19900+ 35100 = 15200
Cash payback period = Year up to which cummulative cash flow is negative+(Cumulative cash flow of that year /cash flow of next year)
= 2+ (19900/ 35100)
= 2+ .57
= 2.57 years
2)Average income = (9600+12800+13900+17600+16700)=70600/5= 14120
Annual rate of return = 14120 / 105400 = .1340 or 13.40%
c) Present value of cash flow = (PVF@11%,1*cf1)+(PVF@11%,2*cf2).........(PVF@11%,5*cf5)
= (.90090*45900)+(.81162*39600)+(.73119*35100)+(.65873*30500)+(.59345*24900)
= 41351.31+ 32140.15+ 25664.77+ 20091.27+ 14776.91
= 134024.40
NPV = 134024.4-105400
= 28624.41 [Rounded to 28624]
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