BAP Corporation is reviewing an investment proposal. The initial cost and estima

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. (Refer the below table)

What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.)

Investment Proposal Year Initial Cost
and Book Value Annual
Cash Flows Annual
Net Income 0 $105,950 1 70,460 $44,100 $8,610 2 42,130 40,900 12,570 3 20,290 35,900 14,060 4 8,410 30,100 18,220 5 0 24,100 15,690

Explanation / Answer

Year Cash Flow Commulative Cash Flow 0 -105950 -105950 1 44100 -61850 2 40900 -20950 3 35900 14950 Cash payback period = 2 +20950/35900                 = 2 +0.58 years                 = 2.58 years

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