Yankay Specialty Metals Corporation is reviewing an investment proposal. The initial cost as well as the estimate of the book value of the investment at the end of each year the net after-tax cash flows for each year and the net income for each year are presented in the following schedule. 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.

Management uses a 16 percent after-tax target rate of return for new investment proposals.

Required:
For requirement (1) only assume that the cash flows in years 1 through 5 occur uniformly throughout each year.
1. Compute the project’s payback period.
2. Calculate the accounting rate of return on the investment proposal. Base your calculation on the initial cost of the investment.
3. Compute the proposal’s net present value.
(CMA,adapted)

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Initial Cost and Book Value Annual Net After-Tax Cash Flows Annual Net Income Year $105,000 70,000 42,000 21,000 7,000 $50,000 45,000 40,000 35,000 30,000 $15,000 17,000 19,000 21,000 23,000