Exercise 24-11 Exercise 24-11 BAP Corporation is reviewing an investment proposa
ID: 2806271 • Letter: E
Question
Exercise 24-11
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 Year Initial Cost
and Book Value Annual
Cash Flows Annual
Net Income 0 $104,070 1 69,030 $44,600 $9,560 2 42,490 40,000 13,460 3 21,260 35,200 13,970 4 8,720 30,600 18,060 5 0 24,500 15,780
BAP Corporation uses a 12% target rate of return for new investment proposals.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Explanation / Answer
Cash Payback period:
From the above table, the cumulative cash flow is turning positive in the Year 3. Assuming cash flows accrue evenly through out the year,
Cash inflows required in year 3 to turn positive =19,470.
Cash inflows per month in year 3=$35,200/12
=$2,933.33
Number of months required to generate $19,470 =$19,470 /$2,933.33
=6.6375 rounded to 6.7 months.
So, the cash payback period is 2 years and 6.7 months.
Answer for rate of return for the investment:
Annual rate of return =(1+r)^n -1 =561.41
(1+r)^5 =562.41
Raising to the power of 1/5 both sides
1+r =1.2283
r=.2283 ie., 22.83%.
Therefore annual rate of return=22.83%.
Answer for net present value:
Year Annual cash flows Cumulative cash flows 0 -104070 -104070 1 44600 -59470 2 40000 -19470 3 35200 15730 4 30600 46330 5 24500 70830Related Questions
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