Drake Corporation is reviewing an investment proposal. The initial cost is $105,000. 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 following schedule. 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. 

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?

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Year Book Value $70,000 42,000 123 + in 4 Investment Proposal Annual Cash Flows 5 21,000 7,000 0 $45,000 40,000 35,000 30,000 25,000 Annual Net Income $10,000 12,000 14,000 16,000 18,000