Drake Corporation is reviewing an investment proposal. The initial cost and esti
ID: 2572922 • 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 69,900 $46,000 $11,400 2 41,000 40,600 11,700 3 21,000 34,800 14,800 4 7,600 31,000 17,600 5 0 24,600 17,000
Explanation / Answer
Given data:
Investment Proposal
Year
Initial Cost
and Book Value
Annual
Cash Flows
Annual
Net Income
0
$104,500
1
69,900
$46,000
$11,400
2
41,000
40,600
11,700
3
21,000
34,800
14,800
4
7,600
31,000
17,600
5
0
24,600
17,000
a) pay back period = 3 years
By the conclusion of this time period,
Initial investment cost = $104,500
drake will recovered the investment's cost of $104,500 ($46,000 + 40,600 + $34,8000 = $121,500), in 3 years
b) Accounting rate of return for the investment =13.87%
rate of return = average income/initial investment
average income = $14,500 ($11,400+$11,700+$14,800+$17,600+$17,000)/5
=$72,500/5 =$14,500
Initial investment =$104,500
Rate of return =($14,500/$104,500)*100%=13.87%
C) net present value = $30,368.80
year
cash inflows
present value factor at 11%
NPV amount
0
$ 1,04,500
1
($104,500)
1
$ 46,000
0.901
$ 41,446.00
2
$ 40,600
0.812
$ 32,967.20
3
$ 34,800
0.731
$ 25,438.80
4
$ 31,000
0.659
$ 20,429.00
5
$ 24,600
0.593
$ 14,587.80
NPV =
$ 30,368.80
Investment Proposal
Year
Initial Cost
and Book Value
Annual
Cash Flows
Annual
Net Income
0
$104,500
1
69,900
$46,000
$11,400
2
41,000
40,600
11,700
3
21,000
34,800
14,800
4
7,600
31,000
17,600
5
0
24,600
17,000
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