BAP Corporation is reviewing an investment proposal. The initial cost and estima
ID: 2490933 • 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.
What is the annual rate of return for the investment?
Investment Proposal Year Initial Costand Book Value Annual
Cash Flows Annual
Net Income 0 $105,190 1 69,220 $45,300 $9,330 2 42,350 39,100 12,230 3 21,260 35,300 14,210 4 6,840 29,300 14,880 5 0 24,600 17,760
What is the annual rate of return for the investment?
Explanation / Answer
the annual rate of return for the investment = (Total life earnings / Initial Investment ) / Number of years
= ( $68410 / 105190 ) / 5 = ( 65.03% ) / 5 = 13%
Year Initial Investment or Initial Book Value Annual Income 1 105190 $9,330 2 69,220 12,230 3 42,350 14,210 4 21,260 14,880 5 6,840 17,760 Total income during life of 5 years= $68410Related Questions
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