Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai
ID: 2499600 • 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 $114,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $57,000. 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.
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
a. Average rate of return = annual profit - Depreciation / investment * 100
= ($57000 - $11400) / 114000 * 100
= 40%
Note:- Depreciation = $114000 / 10 year = $11400 per year
b. cash pay back period = Initial outflow / annual inflow after depreciation
= $114000 / $57000 - $11400
= 114000 / 45600
= 2.5 years
c. Net present value = present value of cash inflow - present value of cash outflow
year Cash flow PVAF(10% , 10 year) present value
0 -114000 1 -114000
1-10 (57000- 11400) 6.145 280212
NPV = $280212- $114000
= $166212
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