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![[The following information applies to the questions displayed below.] 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 investments life Annual Net After-Tax Cash Flows Annual Net Income Initial Cost and Book Value $375,000 250,000 150,000 75,000 25,000 Year 0 $166,000 143,000 120,000 97,000 74,000 41,000 43,000 45,000 47,000 49,000 2 4 0 Management uses a 16 percent after-tax target rate of return for new investment proposals. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)](https://d2vlcm61l7u1fs.cloudfront.net/media%2Fded%2Fded3637b-67fb-406a-a1be-a4d484d25b92%2FphpP3WPlY.png)
[The following information applies to the questions displayed below.] 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 Annual Net After-Tax Cash Flows Annual Net Income Initial Cost and Book Value $375,000 250,000 150,000 75,000 25,000 Year 0 $166,000 143,000 120,000 97,000 74,000 41,000 43,000 45,000 47,000 49,000 2 4 0 Management uses a 16 percent after-tax target rate of return for new investment proposals. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)
Expert Answer
Answer to Requirement 1.
| Year | Annual cash Flows | Cumulative Cash Flows |
| 1 | $166,000 | $166,000 |
| 2 | $143,000 | $309,000 |
| 3 | $120,000 | $429,000 |
| 4 | $97,000 | $526,000 |
| 5 | $74,000 | $600,000 |
Payback period = 2 years + (375,000 – 309,000) / 120,000
Payback period = 2 years + 66,000 / 120,000
Payback period = 2.55 years
Answer to Requirement 2.
Accounting Rate of Return = Average Annual Net Income / Initial Investment
Average Annual Net Income = (41,000 + 43,000 + 45,000 + 47,000 + 49,000) / 5
Average Annual Net Income = $225,000 / 5
Average Annual Net Income = $45,000
Accounting Rate of Return = 45,000 / 375,000 * 100
Accounting Rate of Return = 12%
Answer to Requirement 3.
Net Present Value = PV of Cash Inflow – PV of Cash Outflow
Net Present Value = 415,029 – 375,000
Net Present Value = $40,029
