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Drake Corporation is reviewing an investment proposal. The initial cost is $105,800. 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.

Investment ProposalYearBook Value

Annual

Cash FlowsAnnual

Net Income1$69,800$46,000$10,000242,20039,40011,800321,80034,00013,60046,30029,30013,8005023,22516,925

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

Click here to view the factor table.

(a)

What is the cash payback period for this proposal?(Round answer to 2 decimal places, e.g. 10.50.)

Cash payback period

years

(b)

What is the annual rate of return for the investment?(Round answer to 2 decimal places, e.g. 10.50%.)

Annual rate of return for the investment

%

(c)

What is the net present value of the investment?(If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Net present value$

Legend Service Center just purchased an automobile hoist for $32,100. The hoist has an 8-year life and an estimated salvage value of $3,200. Installation costs and freight charges were $3,500 and $800, respectively. Legend uses straight-line depreciation.

The new hoist will be used to replace mufflers and tires on automobiles. Legend estimates that the new hoist will enable his mechanics to replace 5 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $39, and the labor cost to install a muffler is $15.

(a)

Compute the cash payback period for the new hoist.

Cash payback period

years

(b)

Compute the annual rate of return for the new hoist.(Round answer to 2 decimal places, e.g. 10.52%.)

Annual rate of return.

Linkin Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $56,760. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,600. At the end of 8 years, the company will sell the truck for an estimated $28,600. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset's estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company's cost of capital is 8%.

Click here to view the factor table.

(a)

Compute the cash payback period and net present value of the proposed investment.(If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Cash payback periodEnter a number of years rounded to 1 decimal place

yearsNet present value$enter a dollar amount rounded to 0 decimal places

(b)

Does the project meet the company's cash payback criteria?

select an option

No

Yes

Does it meet the net present value criteria for acceptance?

select an option

Yes

No

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