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.
<h3>Data and Calculations:</h3>
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 <u>3 years</u> ($104,500 - $45,900 - $40,300 - $35,000).
<h3>Net Present Value:</h3>
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
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