Drake Corporation is reviewing an investment proposal. The initial cost and esti
ID: 2529459 • Letter: D
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. t Proposal Initial Cost Annual Cash Flows Annual Net Income Year and Book Value $104,100 69,900 41,600 20,900 7,800 $44,700 40,700 35,000 29,100 25,800 $10,500 12,400 14,300 16,000 18,000 Drake Corporation uses an 11% target rate of return for new investment proposals. What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period years 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 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 sExplanation / Answer
Answer:
1
cash payback period:
Year
Cash Flow
Cumulative Cash Flow
0
-104,100
-104,100
1
44,700
-59,400
2
40,700
-18,700
Payback period is between year 2 and 3
3
35,000
16,300
4
29,100
45,400
5
25,800
71,200
payback period
= = 2 + ($18700/ $35000)
= 2 + 0.53
= 2.53 years
payback period=2.53 years
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2
Annual rate of return
ARR
=Avearge profit / Average investment
=(10500+12400+14300+16000+18000/5 ) / 104100/2
=14240/ 52050
=27.38%
___________________________________________________
3
NPV calculation
Year
Cash
flow
PV factor
at 11%
prasent
value
A
B
C=A*B
0
-104,100
1
-104100
1
44,700
0.9009
40270.23
2
40,700
0.8116
33032.12
3
35,000
0.7312
25592
4
29,100
0.6587
19168.17
5
25,800
0.5935
15312.3
NPV
29274.82
NPV=29,274.82
Year
Cash Flow
Cumulative Cash Flow
0
-104,100
-104,100
1
44,700
-59,400
2
40,700
-18,700
Payback period is between year 2 and 3
3
35,000
16,300
4
29,100
45,400
5
25,800
71,200
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