Great Plains Transportation Inc. is considering acquiring equipment at a cost of

Question

Great Plains Transportation Inc. is considering acquiring equipment at a cost of $165,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $33,000. The company's minimum desired rate of return for net present value analysis is 10%.

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.
%

b. The cash payback period.
Select2345678Item 2 years

c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value" for current grading purpose.

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 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 3.352 2.991 6 4.917 4.355 4.111 3.784 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

Explanation / Answer

a) Yearly Net Cash Flows        33,000.00 Depreciation (165,000/10)        16,500.00 Average Return        16,500.00 ARR   = Average Return/Avg Investment ARR   = 16,500/165,000 ARR   = 10% b) PBP Time Amount Cumulative                                                                                                 -   (165,000.00)        (165,000.00)                                                                                            1.00        33,000.00        (132,000.00)                                                                                            2.00        33,000.00          (99,000.00)                                                                                            3.00        33,000.00          (66,000.00)                                                                                            4.00        33,000.00          (33,000.00)                                                                                            5.00        33,000.00                            -                                                                                              6.00        33,000.00            33,000.00                                                                                            7.00        33,000.00            66,000.00                                                                                            8.00        33,000.00            99,000.00                                                                                            9.00        33,000.00          132,000.00                                                                                          10.00        33,000.00          165,000.00 PBP= 5 Years c) Statemnet showing Cash flows Particulars Time PVf@10% Amount PV Cash Outflows                         -                         1.00           (165,000.00) (165,000.00) PV of Cash outflows (165,000.00) Cash inflows 1-10                  6.1450                33,000.00     202,785.00 PV of Cash Inflows     202,785.00 NPV       37,785.00 Present value of annual net cash flows     202,785.00 Less amount to be invested     165,000.00 Net present value        37,785.00

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