Drake Corporation is reviewing an investment proposal. The initial cost and esti

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.

Drake Corporation uses an 11% target rate of return for new investment proposals.

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What is the annual rate of return for the investment? (Round answer to 2 decimal places, e.g. 10.50.)

Investment Proposal Year Initial Cost
and Book Value Annual
Cash Flows Annual
Net Income 0 $105,600 1 69,300 $44,900 $8,600 2 42,500 40,600 13,800 3 20,600 35,200 13,300 4 6,700 29,600 15,700 5 0 24,200 17,500

Explanation / Answer

ans Annual rate of Return 13.05 % Average retun/Investment 13780/105600*100 Average return-68900/5 $13,780 Year Initial Cost Annual Annual and Book Value Cash Flows Net Income 0 $105,600 1 69,300 $44,900 $8,600 2 42,500 40,600 13,800 3 20,600 35,200 13,300 4 6,700 29,600 15,700 5 0 24,200 17,500 Total $68,900 Year Cash flow Discount factor 11% Discounted Cash flow 0 -105600 1 -105600 1 $44,900 0.90090 40450 2 40,600 0.81162 32952 3 35,200 0.73119 25738 4 29,600 0.65873 19498 5 24,200 0.59345 14362 ans NPV 27400

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