Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai

Question

Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plains Transportation Inc. is considering acquiring equipment at a cost of $268,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $67,000. 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.
____ 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 4.192

Explanation / Answer

a) Cash Flows = Net Income + Depreciation

Depreciation = 268,000 / 10 = 26,800

Net Income = 67,000 - 26,800 = 40,200

Average Rate of Return = Net Income / Investment = 40,200 / 268,000 = 15.0%

b) Cash Payback Period = Investment / Cash Flows = 268,000 / 67,000 = 4.0 years

c) PV of cash flows = 67000 x 6.145 = 411,715

Investment = 268,000

NPV = 411,715 - 268,000 = 143,715

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.