Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai
ID: 2498647 • Letter: A
Question
Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plains Transportation Inc. is considering acquiring equipment at a cost of $142,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $71,000. The company's minimum desired rate of return for net present value analysis is 15%.
Present Value of an Annuity of $1 at Compound Interest 2090 0.943 0.909 0.893 0.870 0.833 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.352 2.991 3.784 3.326 5.582 4.868 .564 4.160 3.605 6.210 5.335 4.968 4.487 3.837 6.802 5.759 5.328 4.772 4.031 7.360 6.145 5.650 5.019 4.192 Year 690 10% 12% 15% 2 1.833 1.736 1.690 1.626 4 6 7 8 4.9174.355 4.111 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 Select 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 valueExplanation / Answer
Initial Price =142000
Estimated life =10 years
Salvage value=10 years
Net cash inflows=71000
Required rate of return =15 %
Average rate of return=Total return/Useful life =71000*10-142000 /10=56800 per annum
Cash payback period 2 years
Year
Yearly cash inflow
Initial cost
0
71000
142000
1
71000
71000
2
71000
0
3
71000
4
71000
5
71000
6
71000
7
71000
8
71000
9
71000
10
71000
Net Present value method =Present value of cash inflows-Present value of cash outflows
Net Present value =71000/(1+.15) +71000/(1+.15)^2…………………………+71000/(1+1.15)^10-142000
NPV =356332.6 -142000=214332
Year
Yearly cash inflow
Initial cost
0
71000
142000
1
71000
71000
2
71000
0
3
71000
4
71000
5
71000
6
71000
7
71000
8
71000
9
71000
10
71000
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