Drake Corporation is reviewing an investment proposal. The initial cost and esti
ID: 2488273 • Letter: D
Question
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.
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.)
(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? (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.)
and Book Value Annual
Cash Flows Annual
Net Income 0 $104,100 1 70,500 $44,900 $11,300 2 42,400 39,200 11,100 3 20,600 34,600 12,800 4 6,800 29,100 15,300 5 0 24,600 17,800
Explanation / Answer
Year
Cash flows
PVF
Present value
1
44900
0.9009
40450
2
39200
0.8116
31816
3
34600
0.7312
25299
4
29100
0.6587
19169
5
24600
0.5935
14599
131333
a) Cash payback period for this proposal
= The payback period is the time required for the amount invested in an asset to be repaid by the net cash outflow generated by the asset.
= 3 years + .0.06
=3.06 years
b) Annual rate of return for the investment
= (principal + gain/principal) ^ (1/years) – 1
=[ (104100+ 68300)/104100] ^ (1/5)-1
= 10.62%
c) Net present value of the investment= present value of cash inflows – present value of cash outflows
= $131333 – $104100
= $ 27233
Year
Cash flows
PVF
Present value
1
44900
0.9009
40450
2
39200
0.8116
31816
3
34600
0.7312
25299
4
29100
0.6587
19169
5
24600
0.5935
14599
131333
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