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.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Explanation / Answer

Cumulative cash flow of 2 years =44600+39100=83700

Third years cash flow =35600

Remaining initial investment=104780-83700=21080

Third year proportionate=21080/35600=.59

So pay back period =2.59 years

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