BAP Corporation is reviewing an investment proposal. The initial cost and estima
ID: 2744556 • Letter: B
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.Investment Proposal Year Initial Cost
and Book Value Annual
Cash Flows Annual
Net Income 0 $105,740 1 70,840 $44,800 $9,900 2 41,570 40,800 11,530 3 20,900 34,900 14,230 4 7,220 29,800 16,120 5 0 25,600 18,380
BAP Corporation uses a 12% target rate of return for new investment proposals.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Explanation / Answer
a) Payback period: Cumulative Year Cash flows cash flows 1 44800 44800 ` 2 40800 85600 3 34900 120500 4 29800 150300 5 25600 175900 Initial investment = $105740 Payback period = 2 + (105740-85600)/34900 = 2.58 Years 2) Annual rate of return: Year Net Income 1 9900 2 11530 3 14230 4 16120 5 18380 70160 Average annual net income/investment = (70160/5)/105740 =13.27% 3) NPV: Year Cash flows pvif - 12% PV 1 44800 0.8929 40000 2 40800 0.7972 32526 3 34900 0.7118 24841 4 29800 0.6355 18938 5 25600 0.5674 14526 PV of cash inflows 130831 Less: Initial investment 105740 NPV 25091
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