Drake Corporation is reviewing an investment proposal. The initial cost and esti

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.

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.)

Investment Proposal Year Initial Cost
and Book Value Annual
Cash Flows Annual
Net Income 0 $104,700 1 69,500 $44,600 $9,400 2 41,000 39,200 10,700 3 21,900 36,000 16,900 4 9,000 30,800 17,900 5 0 24,200 15,200

Explanation / Answer

Answer:

1)cash payback period:

calcultaion of cashpayback period:

Details of the calculation: total amount to be recovered is $104700. In first three years, it has recovered $44600+$39200+$36000=$119800 which above than $104700. The extra amount is $15100. so, to calculate the cash payback period its should take into account the number of years under which the repayment of the cash will happen.

so cash payback period is =2+15100/36000

=2+0.42

=2.42 years.

b) Annual rate of return on investment:

Details of the calculation:

Formulae of the ARR= Average net income/ average investment*100

=((9400+10700+16900+17900+15200)/5)/)(69500+41000+21900+9000+0)/5)

=50%

c)NPV

Details of the calculation:

NPV= -C0+C1/(1+R)^1+C2/(1+R)^2

=-104700+69500/(1+.11)^1+41000/(1+0.11)^2+21900/(1+0.11)^3+9000/(1+0.11)^4+0/(1+0.11)^5

=+$13130.8

(ends)

In $ 0 1 2 3 4 5 Initial cost 104700 Book value 69,500 41,000 21,900 9,000 0 Annual cash flows 44,600 39,200 36,000 30,800 24,200 Annual net income 9,400 10,700 16,900 17,900 15,200

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