Exercise 12-11 Drake Corporation is reviewing an investment proposal. The initia

Question

Exercise 12-11 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 Initial Cost Year and Book Cash Flows Net Income Value $104,100 70,500 42,400 20,600 6,800 11,300 $44,900 39,200 34,600 ,-11,100 29,100- 17-s00 24,600- -15.00 12,800 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 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 s Questien Attempts: O ef 3 used saVE FOR LATER

Explanation / Answer

a) Year Annual cash flows Cumulative Annual cash flows 0 -104100 -104100 1 44900 -59200 2 39200 -20000 3 34600 14600 4 29100 43700 5 24600 68300 Payback period=A+(B/C) A=Last period with a negative cumulative cashflow=2 years B=Absolute value of cumulative cashflow at the end of period A=20000 (Ignore minus sign) C=Total cashflow during the period after A=34600 Payback period=2 years+(20000/34600)=2.58 years b) Annual rate of return=(Average net income/Initial investment)*100 Average net income=(11300+11100+12800+15300+17800)/5=13660 Annual rate of return=(13660/104100)*100=13.12% c) Year Cashflow Present value @11% Present value of cashflows 0 -104100 1 -104100 1 44900 0.9009009 40450 2 39200 0.81162243 31816 3 34600 0.73119138 25299 4 29100 0.65873097 19169 5 24600 0.59345133 14599 Net present value 27233

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