Average rate of return, cash payback period, net present value method Great Plai

Question

Average rate of return, cash payback period, net present value method Great Plains Railroad Inc. is considering acquiring equipment at a cost of $450,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $75,000. The company's minimum desired rate of return for net present value analysis is 10%. Compute the following: The average rate of return, giving effect to straight-line depreciation on the investment. Round whole percent to one decimal place. The cash payback period. The net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 2). Round to the nearest dollar.

Explanation / Answer

a. Calculation Average rate of Return =

Net Cash flow = $ 75,000

Less; Depreciation = $ 45,000

Profit = $ 30,000

The Average Rate of Return = Average Profit / Average Investment = 30000 / 450000 = 6.67%

b. The Cash Pay Back period = Net Cash flow = 75,000, Investment = 450,000

Pay Back Periiod = 450,000 / 75,000 = 6 Years

c. Tne NPV of the Project = $ 10,875

Yearly Net Cash flow = 75000 PVIFA at 10 years and 10% 6.145 Present Value (75000*6.145) = $ 460,875 Investment = $ 450,000 NPV = $ 10,875 ( 460875 - 450000)

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