E12-11 BAP Corporation is reviewing an investment proposal.

The initial cost and esti- mates of the book value of the inve
the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule be
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 equ
book value. There would be no salvage value at the end of the investment’s life.

Investment Proposal

Year
0
1
2
3
4
5
BAP Corporation uses a 12% 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?
(CMA-Canada adapted)
Initial Cost and Book Value
AnnualCash Flows Annual Net Income

$105,000
70,000 $45,000 10000
42,000 40,000 12,000
21,000 35,000 14,000
7,000 30,000 16,000
0 25,000 18,000
70000
14000
0.133333333333333

Answer A
Year AnnualCash Flows Cumulative AnnualCash Flows
1 $ 45,000 $ 45,000
2 $ 40,000 $ 85,000
3 $ 35,000 $ 120,000
4 $ 30,000 $ 150,000
5 $ 25,000 $ 175,000

Payback Period = $ 85,000 is recovered in 2 years and balance $ 20,000($ 105,000 less $ 85,000) will be recovered in 3rd year
Payback Period = 2.57 years

Answer B
Annual rate of return = Average Annual Income/Initial Investment * 100
Annual rate of return = $ 14,000/$ 105,000 * 100 = 13.33 %

Average Annual Income = ($ 10,000 add $ 12,000 add $ 14,000 add $ 16,000 add $ 18,000)/5 = $ 14,000

Answer C
Year AnnualCash Flows Discount factor 12 % Discounted Cashflows
0 $ -105,000.00 1 $ -105,000.00
1 $ 45,000.00 0.893 $ 40,178.57
2 $ 40,000.00 0.797 $ 31,887.76
3 $ 35,000.00 0.712 $ 24,912.31
4 $ 30,000.00 0.636 $ 19,065.54
 5 $ 25,000.00 0.567 $ 14,185.67
Net Present Value $ 25,229.85
l be recovered in 3rd year out of cashflow of $ 35,000