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Average Rate of Return, Cash Payback Period, Net Present Value Method Bi-Coastal Railroad Inc. is considering...

  1. Average Rate of Return, Cash Payback Period, Net Present Value Method

    Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $220,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $44,000. 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 3.353 2.991
    6 4.917 4.355 4.111 3.785 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

    Compute the following:

    a. The average rate of return, assuming the annual earnings are equal to the net cash flows less the annual depreciation expense on the equipment. 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 annual net cash flows $
    Less amount to be invested $
    Net present value $

Check My Work2 more Check My Work uses remaining.

Homework Answers

Answer #1

a. Average rate of return = $22000 / 110000 = 20% or it can be 10%, if average investment is not used
Annual Earnings = $44000 - 22000 = $22000

b. Cash Payback period = Investment / Net Annual Cash Inflows
= $220000 / 44000 = 5 years

c.

Present value of annual net cash flows $      44,000 5.019 $   2,20,836
Less amount to be invested $   2,20,000
Net present value $            836
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