Year 1 2 3 4 5 Investment Proposal Book Value $69,900 41,000 21,000 7,600 0 Annual Cash Flows $46,000 40,600 36,000 31,000 24,220 Annual Net Income $11,300 11,700 16,000 17,600 16,620 Drake Corporation uses an 11% target rate of return for new investment proposals.

Year 1 2 3 4 5 Investment Proposal Book Value $69,900 41,000 21,000 7,600 0 Annual Cash Flows $46,000 40,600 36,000 31,000 24,220 Annual Net Income $11,300 11,700 16,000 17,600 16,620 Drake Corporation uses an 11% target rate of return for new investment proposals.

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

Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

Don't give answer in image format

Current Attempt in Progress
Drake Corporation is reviewing an investment proposal. The initial cost is $104,600. 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.
Year
1
2
3
4
5
Investment Proposal
Annual
Cash Flows
Book Value
$69.900
41,000
21,000
7,600
0
$46,000
40,600
36,000
31,000
24,220
Annual
Net Income
$11,300
11,700
16,000
17,600
16,620
Drake Corporation uses an 11% target rate of return for new investment proposals.

(a)
What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.)
Cash payback period
(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
years
Net present value $
%
(c)
What is the net present value of the investment? (If the net present value is negative, use either a negative sign preceding the number e.g. -45
or parentheses eg (45). Round answer to 0 decimal places, eg. 125. For calculation purposes, use 5 decimal places as displayed in the factor
table provided.)

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