Exercise 24-11 Your answer is partially correct. Try again. Drake Corporation is
ID: 2532356 • Letter: E
Question
Exercise 24-11 Your answer is partially correct. Try again. 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 Investment Proposal Initial Cost and Book Annua Cash FlowsNet Income Annual Year Value $104,100 69,400 42,600 20,500 8,800 $44,300 39,700 34,600 30,300 24,700 $9,600 12,900 12,500 18,600 15,900 Drake Corporation uses an 11% target rate of return for new investment proposals. Click here to view PV table. What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.5o.) Cash payback period 258yeaExplanation / Answer
Solution:
Average/Accounting Rate of Return (ARR)
Net Income means Average Annual Net Income after Depreciation and Taxes
ARR = or
Average Investment = ½ (Initial Investment + Scrap Value)
Here, we need to Average the annual income.
Average Annual Net Income = (9600 + 12900 + 12500 + 18600 + 15900)/5 = $13,900
Initial Investment = $104,100
Annual Rate of Return = Average Net Income 13,900 / Initial Investment 104,100 x 100
= 13.35%
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