BAP Corporation is reviewing an investment proposal. The initial cost and estima
ID: 2477361 • 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.
BAP Corporation uses a 12% target rate of return for new investment proposals.
What is the annual rate of return for the investment? (Round answer to 2 decimal places, e.g. 10.50.)
and Book Value Annual
Cash Flows Annual
Net Income 0 $105,240 1 69,810 $44,700 $9,270 2 41,100 40,800 12,090 3 20,220 35,200 14,320 4 6,470 29,200 15,450 5 0 24,200 17,730 edugen.wileyplus.com References TABLE 1 Future Value of 1 (n) Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 15% 10 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.04000 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 1.11000 1.12000 1.15000 1.08160 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 1.23210 1.25440 1.32250 1.12486 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 1.36763 1.40493 1.52088 1.16986 1.21551126248 1.31080 1.36049 1.41158 1.46410151807 1.57352 1.74901 1.21665 1.27628 1.33823 1.40255 1.46933 1.53862 1.61051168506 1.76234 2.01136 1.26532 1.34010 1.41852 1.50073 1.58687 1.67710 1.77156 1.87041197382 2.31306 1.31593 1.40710 1.50363 1.60578 1.71382 1.82804 1.94872 2.07616 2.21068 2.66002 1.36857147746 1.59385 1.71819 1.85093 1.99256 2.14359 2.30454 2.47596 3.05902 1.42331 1.55133 1.68948 1.83846 1.99900 2.17189 2.35795 2.55803277308 3.51788 1.48024 1.62889 1.79085 1.96715 2.15892 2.36736 2.59374 2.83942 3.10585 4.04556 11 12 13 14 15 1.53945 1.71034 1.89830 2.10485 2.33164258043 2.85312 3.15176 3.47855 4.65239 1.60103 1.79586 2.01220 2.25219 2.51817281267 3.13843 3.49845 3.89598 5.35025 1.66507188565 2.13293 2.40985 2.71962 3.06581 3.45227388328 4.36349 6.15279 1.73168 1.97993 2.26090 2.57853 2.93719 3.34173 3.79750 4.31044 4.88711707571 1.80094 2.07893 2.39656 2.75903 3.17217 3.64248 4.17725 4.78459547357 8.13706 16 17 18 19 20 1.87298 2.18287 2.54035 2.95216 3.42594397031 4.59497531089 6.13039 9.35762 1.94790 2.29202269277 3.15882 3.70002 4.32763 5.05447589509 6.86604 10.76126 2.02582 2.40662 2.85434 3.37993 3.99602 4.71712 5.55992 6.54355 7.68997 12.37545 2.10685 2.52695 3.02560 3.61653 4.31570 5.14166 6.11591726334 8.61276 14.23177 2.19112265330 3.20714 3.86968 4.66096 5.60441 6.72750 8.06231964629 16.36654 CLOSE
Explanation / Answer
Investment Proposal Year Initial Cost Annual cummulative cash flow Annual PV interest factor PV of Net income and Book Value Cash Flows Net Income 0 $105,240 ($105,240) 1 69,810 $44,700 ($60,540) $9,270 0.8929 $8,276.79 2 41,100 40,800 ($19,740) 12,090 0.7972 $9,638.07 3 20,220 35,200 $15,460 14,320 0.7118 $10,192.69 4 6,470 29,200 $44,660 15,450 0.6355 $9,818.75 5 0 24,200 $68,860 17,730 0.5674 $10,060.48 $68,860 Total $47,986.79 5 Years 5 $13,772.00 Average $9,597.36 Annual rate of return 13.09% 9.12% Payback period= 2+(19740/53200) 2.37 years discountedAnnual rate of return= (47986.79/105240)/5 9.12%
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