Exercise 24-11 Drake Corporation is reviewing an investment proposal. The initia
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Question
Exercise 24-11
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
Year Book value Net Cash Flow Cumulative cash flow Net Income 0 105000 -105000 1 69100 $45,900 ($59,100) $9,600 2 42300 39600 ($19,500) 12800 3 21100 35100 $15,600 13900 4 8200 30500 $46,100 17600 5 0 24900 $71,000 16700 Total $131,250 $70,600 No of years 5 Average Rate Total/5 14120 70600/5 Annual Rate of Return Average Profit/Average investment 14120/((105000+0)/2)*100 26.90 % ans 2 Payback period 2 years+(19500/35100) 2.56 years ans NPV Present value of net cash flow $134,025 Amount to be invested 105000 Net present value $29,025 working Year Net Cash Flow Discount factor 12% Discounted cash flow 1 $45,900 0.90090 $41,351 2 $39,600 0.81162 $32,140 3 $35,100 0.73119 $25,665 4 $30,500 0.65873 $20,091 5 $24,900 0.59345 $14,777 $176,000 $134,025 If any doubt please comment
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