Question

Crane Corporation is reviewing an investment proposal. The initial cost is $103,400. 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 Initial Costand Book Value Annual Cash Flows Annual Net Income
0 $104,500
1 69,300 $45,900 $10,700
2 42,100 40,300 13,100
3 21,100 35,000 14,000
4 7,700 30,800 17,400
5 0 25,600 17,900
Drake Corporation uses an 11% target rate of return for new investment proposals.
Required:
a. What is the cash payback period for this proposal?
b. What is the annual rate of return for the investment?
c. What is the net present value of the investment?

Answer 1

a) The cash payback period for Crane Corporation's investment proposal is 3 years.

b) The annual rate of return for the investment is as follows:

Year 1 = 10% ($10,700/$104,500 x 100)

Year 2 = 19% ($13,100/$69,300 x 100)

Year 3 = 33% ($14,000/$42,100 x 100)

Year 4 = 82.5% ($17,400/$21,100 x 100)

Year 5 = 232% ($17,900/$7,700 x 100)

c) The net present value of the investment by Crane Corporation is $30,643.

Data and Calculations:

Target rate of return = 11%

Year   Initial Cost and Book Value  Annual Cash      Annual Net

                                                               Flows                Income

0                 $104,500

1                                        69,300        $45,900            $10,700

2                                        42,100          40,300               13,100

3                                         21,100         35,000               14,000

4                                         7,700          30,800               17,400

5                                               0          25,600                17,900

The cash payback period is 3 years ($104,500 - $45,900 - $40,300 - $35,000).

Net Present Value:

Year   Annual Cash Flows    PV Factor        Present Value

0               -$104,500                     1                 -$104,500

1                  $45,900                0.901                  $41,356

2                 $40,300                0.812                   32,724

3                 $35,000                 0.731                  25,585

4                 $30,800                0.659                 20,297

5                $25,600                 0.593                   15,181

Net Present value =                                        $30.643

Learn more about the payback period and NPV at brainly.com/question/16999673

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