Drake Corporation is reviewing an investment proposal. The initial cost is $107,700. 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 assumed to equal its book value. There would be no salvage value at the end of the investment’s life.
Investment Proposal
Year Book Value Annual Cash Flows Annual Net Income
1 $69,300 $45,700 $7,300
2 41,600 40,400 12,700
3 21,300 36,000 15,700
4 8,200 31,000 17,900
5 0 24,605 16,405
Drake Corporation uses an 11% target rate of return for new investment proposals.
What is the cash payback period for this proposal?
