P13-43B ICA Corporation is reviewing an investment proposal. The schedule below
ID: 2792925 • Letter: P
Question
P13-43B ICA Corporation is reviewing an investment proposal. The schedule below presents the initial cost and esti- (SO 1, 2, 5) mates of the investment's book value at the end of each year, the net cash flows for each year, and the net income for each Calculate the payback, year. All cash flows are assumed to take place at the end of the year. The investment's salvage value at the end of each year annual rate of returrn, is equal to its book value. There would be no salvage value at the end of the investments life. and net present value. 590 CHAPTER 13 Planning for Capital Investment:s Investment Proposal Initial Cost and Book Value $250,000 170,000 140,000 90,000 45,000 Year Annual Cash Flows Annual Net Income $90,000 75,000 60,000 40,000 30,000 $25,000 27,000 29,000 31,000 33,000 4 ICA Corporation uses a 15% target rate of return for new investment proposals. Instructions (a) Calculate the cash payback period for this proposal. (b) Calculate the annual rate of return for the investment. (c) Calculate the net present value of the investment. (b) ARR 23.2% (adapted from CMA Canada, now CPA Canada)Explanation / Answer
Payback=3+(+250000-90000-75000-60000)/40000=3.625 years
Net Present Value=-250000+90000/1.15+75000/1.15^2+60000/1.15^3+40000/1.15^4+30000/1.15^5=-37791.9
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