Question

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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.

Year	Initial Cost and Book Value			Annual Net After-Tax Cash Flows			Annual Net Income
0	$	345,000
1		230,000		$	162,000		$	47,000
2		138,000			141,000			49,000
3		69,000			120,000			51,000
4		23,000			99,000			53,000
5		0			78,000			55,000

  

Management uses a 14 percent after-tax target rate of return for new investment proposals.

1.	Compute the project’s payback period. Assume that the cash flows in years 1 through 5 occur uniformly throughout each year. (Round your answer to 2 decimal places.)

3.	Compute the proposal’s net present value.

Answer 1

Payback period= 2+ (423000-345000)/120000=2.65

Working Note for Payback period
Year	Annual cash Flows	Cumulative Cash Flows
1	$162,000	$162,000
2	$141,000	$303,000
3	$120,000	$423,000
4	$99,000	$522,000
5	$78,000	$600,000

Computation of NPV
Year	Annual cash Flows	PVF@ 14%	Present Value
0	-345000	1.0000	(345,000.00)
1	$162,000	0.8772	142,105.26
2	$141,000	0.7695	108,494.92
3	$120,000	0.6750	80,996.58
4	$99,000	0.5921	58,615.95
5	$78,000	0.5194	40,510.76
	NPV		85,723.47