Norman Rentals can purchase a van that costs $78,000; it has an expected useful

Question

Norman Rentals can purchase a van that costs $78,000; it has an expected useful life of three years and no salvage value. Norman uses straight-line depreciation. Expected revenue is $39,221 per year. Assume that depreciation is the only expense associated with this investment. Required Determine the payback period. (Round your answer to1 " decimal place.) ck pe years b. Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., 234 should be entered as 23.4).)

Explanation / Answer

a. Payback period=Initial investment/Revenue per year=78000/39221=1.99=2 years b. Depreciation=(Initial investment-Salvage value)/Useful life=(78000-0)/3=26000 Net income=Revenue-Depreciation=39221-26000=13221 Average cost of investment=78000/2=39000 Unadjusted rate of return=Net income/Average cost of investment=13221/39000=33.9%

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