Exercise 12-11 Drake Corporation is reviewing an investment proposal. The initia

Question

Exercise 12-11 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 Initial Cost Year and Boolk Annual Cash Flows Annual Net Income Value $104,500 70,600 41,100 21,700 6,700 0 $44,700 39,400 34,700 29,400 25,400 $10,800 9,900 15,300 14,400 18,700 4 Drake Corporation uses an 11% target rate of return for new investment proposals. What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period ears 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 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

Year Initial cost & book value Annual cash flows A Cumulative cash flow Discount factor 11% D Discounted cash flow A*D Annual Net income 0 $104,500 0 ($104,500) ($104,500) 0 1 70600 $44,700 ($59,800) 0.90090 $40,270.27 $10,800 2 41100 $39,400 ($20,400) 0.81162 $31,977.92 9900 3 21700 $34,700 $14,300 0.73119 $25,372.34 15300 4 6700 $29,400 $43,700 0.65873 $19,366.69 14400 5 0 $25,400 $69,100 0.59345 $15,073.66 18700 Total NPV $27,561 69100 ans a Payback period Year 2+(20400/34700) 2.59 years ans b Annual rate of return Average net income/Initial investmnet Average net income 69100/5 13820 13820/104500*100 13.22 % if in case avg investment is taken than 13820/52250*100 26.45 % ans c NPV $27,561

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