BAP Corporation is reviewing an investment proposal. The initial cost and estima

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.

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 Initial Cost Annual Cash Flows Annual Net Income and Book ear Value 105,320 69,890 42,580 21,750 8,420 $45,800 40,500 34,400 30,500 25,700 $10,370 13,190 13,570 17,170 17,280 2 4 BAP Corporation uses a 12% target rate of return for new investment proposals

Explanation / Answer

Computation of cash payback period:

The cash payback of the initial cost of $ 105,320 happens in the 3rd year. To be precise, it happens in 2 +

( 105,320- 86,300) / 120,700 - 86,300) = 2. 55 years

Year Annual cash flows Cumulative cash flows 1 45,800 45,800 2 40,500 86,300 3 34,400 120,700 4 30,500 151,200 5 25,700 176,900

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