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. Investment Proposal Year Initial Cost and Book Value Annual Cash Flows Annual Net Income 0 $104,700 1 71,000 $44,600 $10,900 2 41,100 39,500 9,600 3 21,300 35,500 15,700 4 8,500 29,400 16,600 5 0 25,600 17,100 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

(a) What is the cash payback period for this proposal?

In calculating cash back period on cashflows after adding depreciation should be considered. from above table we can work out Cumulative Annual cash flow after deprecation for calculating cash payback period. $78,300 cash will be recovered in first year and $26,400 will be recovered between year 1 and year 2 out of total investment of $104,000

Cash paybck period = 1 year + ($26,400/$69400)

=1 year + 0.3804

=1.38 years.

(b) What is the annual rate of return for the investment?

=Average income/ initial investment *100

= ($69,900/5 years) / $104,000*100

=$13,980// $104,700*100

= 13.44%

(c) What is the net present value of the investment?

NPV of project is $28,056

(c) What is the net present value of the investment?

All figures are in $ Year Initial Cost and Book Value Depreciation Annual Cash Flows Annual Cash Flows after Deprecation Cumulative Annual cash flow after deprecation Annual Net Income 0           104,700 1              71,000              33,700            44,600            78,300          (26,400)          10,900 2              41,100              29,900            39,500            69,400            43,000            9,600 3              21,300              19,800            35,500            55,300            98,300          15,700 4                8,500              12,800            29,400            42,200          140,500          16,600 5                       -                  8,500            25,600            34,100          174,600          17,100 Total          174,600          69,900

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