Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai
ID: 2560844 • Letter: A
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Average Rate of Return, Cash Payback Period, Net Present Value Method
Great Plains Transportation Inc. is considering acquiring equipment at a cost of $304,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $38,000. 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.
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.
Average Rate of Return, Cash Payback Period, Net Present Value Method
Great Plains Transportation Inc. is considering acquiring equipment at a cost of $304,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $38,000. 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 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 4.192Compute 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 annual net cash flows $ Less amount to be invested $ Net present value $Explanation / Answer
a Average rate of return = Average Net income / Average investment
= [net cash flows - Depreciation] / [(cost + residual value) / 2]
= [$38,000 - $30400 ] / [($304,000+ 0) / 2]
= $7600 / $152000
= 5%
Note:- Depreciation per year = $304,000 / 10 years
=$30400
b. cash payback period = initial investment / Annual cash inflow
= $304,000 / $38,000
= 8 years
c. Present value of annual net cash flows [$38,000 * PVAF(15%, 10 years] =$190722
Less : amount to be invested (initial investment) = $304,000
Net present value = ($113278)
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