## Answers

**Solution a:**

Computation of cumulative cash flows | ||

Year | Cash Flows | Cumulative cash flows |

1 | $46,000.00 | $46,000.00 |

2 | $40,100.00 | $86,100.00 |

3 | $34,000.00 | $1,20,100.00 |

4 | $29,200.00 | $1,49,300.00 |

5 | $25,970.00 | $1,75,270.00 |

Payback period = 2 year + ($103100- 86100)/ $34000 = 2.50 years

**Solution b:**

Computation of NPV - Drake Company | ||||

Particulars | Amount | Period | PV Factor | Present Value |

Cash Outflows: | ||||

Initial investment | $1,03,100.00 | 0 | 1 | $1,03,100 |

Present Value of Cash Outflows (A) | $1,03,100 | |||

Cash Inflows: | ||||

Year 1 | $46,000.00 | 1 | 0.90090 | $41,441 |

Year 2 | $40,100.00 | 2 | 0.81162 | $32,546 |

Year 3 | $34,000.00 | 3 | 0.73119 | $24,860 |

Year 4 | $29,200.00 | 4 | 0.65873 | $19,235 |

Year 5 | $25,970.00 | 5 | 0.59345 | $15,412 |

Present Value of Cash Inflows (B) | $1,33,495 | |||

Net Present Value (B-A) | $30,395 |

**Solution c:**

**Annual rate of return = Average annual income / Average investment**

**Average annual income = ($12,600 + $11,500 + $13,800 + $15,300 + $18,970)/5 = $14,434**

**Average investment = (Initial investment + Salvage value)/2 = ($103,100 + 0) /2 = $51,550**

**Annual rate of return = 14434 / 51550 = 28.00%**