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?

Now we subtract the $86,200 from the $104,500 , so the remaining amount left is $18,300 and if we added the third year cash inflow so the total amount exceed to the initial investment. Hence, we deduct it

And, the next year cash inflow is $35,000

So, the payback period equal to

= 2 years + $18,300 ÷ $35,000

= 2.53 years

b. Annual rate of return is

= Annual net income ÷ initial investment

where,

Annual net income is

= ($10,700 + $13,100 + $14,000 + $17,400 + $17,900) ÷ 5 years

= $14,620

And, the initial investment is $104,500

So, the annual rate of return is

= $14,620 ÷ $104,500

= 14%

c. Net present value is

Year Cash flows Discount rate at 11 % PV of cash inflows

0 -$104,500 1 -$104,500 (A)

1 $45,900 0.9009009009 $41,351.35

2 $40,300 0.8116224332 $32,708.38

3 $35,000 0.7311913813 $25,591.70

4 $30,800 0.6587309741 $20,288.91

5 $25600 0.5934513281 $15,192.35

Present value $135,132.70 (B)

Net present value $306,32.70 (A - B)

Refer to the discount rate table