CMW Ltd is reviewing an investment proposal. The initial costs 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 $105,000
1 $ 70,000 $50,000 $15,000
2 $ 42,000 $45,000 $45,000
3 $ 21,000 $40,000 $19,000
4 $ 7,000 $35,000 $21,000
5 0 $23,000 $23,000
Management uses a 16 percent after-tax target rate of return for new investment proposals.
Required:
(a) Compute the following for the investment proposal:
(i) Payback period. For this purpose only, assume that the cash flows in years 1 to 5 occur uniformly throughout each year.
(ii) Accounting rate of return. Based you calculation on the initial cost of the investment.
(iii) Net present value.
(iv) Internal rate of return.