Kansas Corporation is reviewing an investment proposal that has an initial cost of $52,500. An estimate of the investment's end-of-year book value, the yearly after-tax net cash inflows, and the yearly net income are presented in the schedule below. Yearly after-tax net cash inflows include savings from the depreciation tax shield. The investment's salvage value at the end of each year is equal to book value, and there will be no salvage value at the end of the investment's life.YearInitial Cost and Book ValueYearly After-Tax Net cash InflowsYearly Net Income1$35,000$20,000$2,500221,00017,5003,500310,50015,0004,50043,50012,5005,5005---10,0006,500??$75,000$22,500Kansas uses a 14% after-tax target rate of return for new investment proposals.YearFV of $1 at 14%FV of an ordinary annuity
at 14% PV of $1 at 14%PV of an ordinary annuity at 14% 11.1401.0000.8770.87721.3002.1400.7691.64731.4823.4400.6752.32241.6894.9210.5922.91451.9256.6100.5193.43362.1958.5360.4563.889Required:A. Calculate the project's payback period.B. Calculate the accounting rate of return on the initial investment.C. Calculate the proposal's net present value. Round to the nearest dollar.
What will be an ideal response?
A. The project's payback is 3 years. By the conclusion of this time period, Kansas will have recovered the investment's cost of $52,500 ($20,000 + $17,500 + $15,000 = $52,500).
B. The accounting rate of return is 8.6%:
Average income ($22,500 ÷ 5 years = $4,500) ÷ initial investment ($52,500)
C.
| Year 0: | $(52,500) × 1.0 | $(52,500) |
| Year 1: | $20,000 × 0.877 | 17,540 |
| Year 2: | $17,500 × 0.769 | 13,458 |
| Year 3: | $15,000 × 0.675 | 10,125 |
| Year 4: | $12,500 × 0.592 | 7,400 |
| Year 5: | $10,000 × 0.519 | 5,190 |
| ? | ? | $1,213 |
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