Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai
ID: 2577369 • 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 $120,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $30,000. 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 $120,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $30,000. 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=Net income/Average investment Net income=Net cashflow-Depreciation Depreciation=(Cost of equipment-residual value)/Estimated life=120000/10=$12000 per year Net income=30000-12000=18000 Average investment=120000/2=60000 Average rate of return=(18000/60000)*100=30% b. Cash payback period=Cost of capital investment/Annual cashinflow=120000/30000=4 years c. Present value of annual net cashflows (Note:1) 90342 Less: Amount to be invested 120000 Net present value -29658 Notes: 1. Annual cashflow 30000 Less:Depreciation 12000 Annual net cashflow 18000 Present value of an annuity @ 15% 5.019 Present value of annual net cashflow 90342
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.