Please Calculate cash payback period, annual rate of return on investment, and n

Question

Please Calculate cash payback period, annual rate of return on investment, and net present value.

Exercise 24-11 (part level submission) BAP 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 Investment Proposal Initial Cost Annual Cash Flows Annual Net Income and Book Value rear $105,640 70,680 42,160 21,150 6,130 $44,500 39,700 34,700 29,900 25,200 $9,540 11,180 13,690 14,880 19,070 2 4 BAP Corporation uses a 12% target rate of return for new investment proposals lick here iew (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Your answer is incorrect. Try again

Explanation / Answer

Part A)

Payback period is the period within which the initial investment is recovered by the company. It has been calculated as follows:

The initial investment of 105,640 will be recovered as follows:

Year 1 = 44,500

Year 2 = 39,700

and the remaining amount of $21,440 (105,640 - 44,500 - 39,700) between Year 2 and Year 3. The formula for calculating payback period can be derived as follows:

Payback Period = Years upto which Partial Recovery is Made + Balance/Cash Flow of the Year in which Balance is Recovered

____________

Payback Period = 2 + 21,440/34,700 = 2.62 Years

____________

Part B)

The accounting rate of return can be calculated with the use of following formula:

Accounting Rate of Return = Average Income/Initial Investment*100

where Average Income = (Sum of Annual Net Income of All Years)/Number of Years

_______

Using the values provided in the question, we get,

Average Income = (9,540 + 11,180 + 13,690 + 14,880 + 19,070)/5 = $13,672

Accounting Rate of Return = 13,672/105,640*100 = 12.94%

____________

Part C)

Net present value is the difference between the present value of cash inflows and cash outflows. It can be calculated as follows:

NPV = -Initial Investment + Cash Flow Year 1*PVIF(Rate,1) + Cash Flow Year 2*PVIF(Rate,1) + Cash Flow Year 3*PVIF(Rate,3) + Cash Flow Year 4*PVIF(Rate,Year 4) + Cash Flow Year 5*PVIF(Rate,5)

where PVIF is the present value interest factor

____________

Here, Rate = 12%

Using the Present Value Interest Factor for $1, we get,

NPV = -105,640 + 44,500*.89286 + 39,700*.79719 + 34,700*.71178 + 29,900*.63552 + 25,200*.56743 = $23,740.76

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