Exercise 24-11 BAP Corporation is reviewing an investment proposal. The initial
ID: 2795276 • Letter: E
Question
Exercise 24-11 BAP 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 Annual Cash Flows Annual Net Income Year and Book Value $105,000 70,000 42,000 21,000 7,000 0 0 2 3 4 5 $45,000 40,000 35,000 30,000 25,000 $10,000 12,000 14,000 16,000 18,000 BAP Corporation uses a 12% target rate of return for new investment proposals (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period ears 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? (Round answer to 0 decimal places, e.g. 125.) Net present value sExplanation / Answer
Answer a.
Initial Investment = $105,000
Investment recovered in first 2 years is $85,000 ($45,000 + $40,000). Remaining Investment of $20,000 will be recovered in 3rd year
Cash Payback Period = 2 + $20,000 / $35,000
Cash Payback Period = 2.57 years
Answer b.
Average Annual Income = ($10,000 + $12,000 + $14,000 + $16,000 + $18,000) / 5
Average Annual Income = $14,000
Accounting Rate of Return = Average Annual Income / Initial Investment
Accounting Rate of Return = $14,000 / $105,000
Accounting Rate of Return = 13.33%
Answer c.
Required Rate of Return = 12%
NPV = -$105,000 + $45,000/1.12 + $40,000/1.12^2 + $35,000/1.12^3 + $30,000/1.12^4 + $25,000/1.12^5
NPV = $25,229.85
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