Drake Corporation is reviewing an investment proposal. The initial cost is $105,100. 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 assumed to equal its book value. There would be no salvage value at the end of the investment’s life. Investment Proposal Year Book Value Annual Cash Flows Annual Net Income 1 $69,600 $44,000 $8,500 2 41,900 39,500 11,800 3 21,600 36,000 15,700 4 8,300 31,000 17,700 5 0 22,915 14,615 Drake Corporation uses an 11% target rate of return for new investment proposals. Click here to view the factor table. (a) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period years (b) 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 %

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

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Drake Corporation is reviewing an investment proposal. The initial cost is $105,100. 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 assumed to equal its book value. There would be no salvage value at the end of the investment’s life.

Investment Proposal
Year	Book Value	Annual Cash Flows		Annual Net Income
1	$69,600		$44,000		$8,500
2	41,900		39,500		11,800
3	21,600		36,000		15,700
4	8,300		31,000		17,700
5	0		22,915		14,615

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

Click here to view the factor table.

(a)

What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.)

Cash payback period

years

(b)

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

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