eBook Show Me How Calculator Print Item Average Rate of Return, Cash Payback Per
ID: 2405272 • Letter: E
Question
eBook Show Me How Calculator Print Item Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $520,000. The equipment has an estimated life of eight years and no residual value. It is expected to provide yearly net cash flows of $104,000. The company's minimum desired rate of return for net present value analysis is 10%. Present Value of an Annuity of $1 at Compound Interest 10% 12% 15% 20% 1 0.9430.909 0.893 0.870 0.833 2 1.833 1736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 Year 690 Compute the following: a. The average rate of return, giving effect to straight-line depreciation on the investment. If required, round your answer to one decimal place. 0.2 X % b. The cash payback period. s years vExplanation / Answer
a.Yearly Cash Flows = 104,000
Depreciation SLM 520,000/8 = 65,000
Yearly Profit = 39,000
Average Investment = (520,000+0)/2 = 260,000
Average rate of return = 39000*100/260,000 = 15%
b. Cash Payback Period = Initial Investment/Annual Cash Inflow
= 520,000/104000 = 5
c. Present Value of Annual Cash Inflows = 104,000*PVAF(15%, 8 years)
= 104,000*4.487 = 466,648
Less: Amount to be invested = 520,000
Net Present Value = (53,352)
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