EX 10-14 Average rate of return, cash payback period, net present value method f
ID: 2494219 • Letter: E
Question
EX 10-14 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%. Compute the following: The average rate of return, giving effect to straight-line depreciation on investment, The cash payback period. The net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). Round to the nearest dollar.Explanation / Answer
PARTICULARS YEAR CASH FLOW DISCOUNTING FACTOR PRESENT VALUE
EQUIPMENT ACQUIRED 0 (520000) 1 (520000)
NET CASH FLOWS 1-8 104000 5.335 554840
(C) NPV $34840
DEPRECIATION = 520000/8
= $65000
AVRAGE PROFIT AFTER DEPRECIATION = NET CASH FLOWS + DEPRECIATION
= 104000 + 65000
= $169000
AVERAGE INVESTMENT = 520000/2 = $260000
AVERAGE RATE OF RETURN = AVRAGE PROFIT AFTER DEPRECIATION / AVERAGE INVESTMENT
= 169000/260000
(A) = 65%
CASH PAYBACK PERIOD = CUMULATIVE NET CASH FLOWS OF 5 YEARS
= 104000 * 5
= 520000 = ORIGINAL INVESTMENT
(B) = 5 YEARS
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