Question
Drake Corporation is reviewing an investment proposal. The initial cost and estimates of the book value of the investment at the end of each year,
Drake Corporation is reviewing an investment proposal. The initial cost and 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 equal to its book value. There would be no salvage value at the end of the investments life. Investment Proposal Year Initial Cost and Book Value Annual Cash Flows Annual Net Income 0 $105,900 1 69,200 $44,600 $7,900 2 43,000 39,700 13,500 3 21,800 34,400 13,200 4 6,400 30,200 14,800 5 0 24,600 18,200 Drake Corporation uses an 11% target rate of return for new investment proposals.
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