Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai

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Average Rate of Return, Cash Payback Period, Net Present Value Method

Great Plains Transportation Inc. is considering acquiring equipment at a cost of $200,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $40,000. 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.

Average Rate of Return, Cash Payback Period, Net Present Value Method

Great Plains Transportation Inc. is considering acquiring equipment at a cost of $200,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $40,000. 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 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

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 annual net cash flows $ Less amount to be invested $ Net present value $

Explanation / Answer

a. Average Rate of Return

Cost of Equipment = $200,000

Working life in years = 10 years

Depreciation = Cost of Equipment/Working life in years

Depreciation = $200,000/10 = $20,000

Cash flow = $40,000

Average Rate of Return = Total Cash flows after depreciation/(Investment X Working life in years) = $200,000/($200,000 X 10) = 10%

b. Payback Period

Payback period is 5 years

Within 5 years $200,000 is recovered.

c. Net Present Value

Net Present value = $1,542,200 - $200,000 = $1,342,200

Year Cash Flow Depreciation Cash flow after
Depreciation 1 40,000 20,000 20,000 2 40,000 20,000 20,000 3 40,000 20,000 20,000 4 40,000 20,000 20,000 5 40,000 20,000 20,000 6 40,000 20,000 20,000 7 40,000 20,000 20,000 8 40,000 20,000 20,000 9 40,000 20,000 20,000 10 40,000 20,000 20,000 Total 200,000

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