Chapter 12, Problem 12.11E

Drake 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.

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

Instructions

(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?

(CMA-Canada adapted)