Drake Corporation is reviewing an investment proposal. The initial cost and esti
ID: 2498922 • 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 $104,500 1 69,600 $44,000 $9,100 2 41,900 39,500 11,800 3 21,600 35,900 15,600 4 8,300 31,000 17,700 5 0 25,400 17,100
Explanation / Answer
a.
a. The cash payback period is 2 years (104,500 -83,500) /(119,400 -83,500) = 2.58 years
b. Annual rate of return for the investment = average net income / initial investment = 14,260 /104,500
=13.65%
c. Net present value = $ 28,952
Annual cash flows Cumulative cash flows PV factor at 11% Present value 0 (104,500) 1 (104,500) 1 44,000 44,000 0.901 39,644 2 39,500 83,500 0.812 32,074 3 35,900 119,400 0.731 26,243 4 31,000 150,400 0.659 20,429 5 25,400 175,800 0.593 15,062 NPV 28,952Related Questions
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