Great Plains Transportation Inc. is considering acquiring equipment at a cost of
ID: 2494675 • Letter: G
Question
Great Plains Transportation Inc. is considering acquiring equipment at a cost of $220,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $55,000. The company's minimum desired rate of return for net present value analysis is 15%.
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.
???? years
How many 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 4.192Explanation / Answer
Answer
A) Average Rate of Return (if initial investment is considered) = Average Annual Profit after Depreciation / Initial Investment x 100 = ($55,000 - $22,000) / $220,000 x 100 = $33,000 / $220,000 x 100 = 15%
Average Rate of Return (if average investment is considered) = $33,000 / $110,000 x 100 = 30%
B) Cash Payback Period ( when cash flow is uniform) = Initial Investment Amount / Annual Cash Flow = $220,000 / $55,000 = 4 years
C)
Present Value of Annual net Cash flows ($55,000 x PVIFA (15%, 10) = $55,000 x 5.019 $276,045 Less amount to be invested ($220,000) Net present value $56,045Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.