Question

Perez Rentals can purchase a van that costs $155,000; it has an expected useful life of five years and no salvage value. Perez uses straight-line depreciation. Expected revenue is $56,730 per year. Assume that depreciation is the only expense associated with this investment.

Required

a. Determine the payback period. (Round your answer to 1 decimal place.)

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).)

Answer 1

Solution:

Answer (a):

This can be calculated by dividing the cost of the van by the amount of expected revenue per year.

Payback period = $155,000 / $56,730

Therefore, The payback period is = 2.7 years

Answer (b):

It should be determined by dividing the average annual profits over the expected useful life of the van by the average amount of investment in the van.

Average annual profits over the expected useful life of the van :

= Expected revenue - Depreciation on van.

= $56,730 - ($155,000 / 5)

= $25,730

Average amount of investment in the van = $155,000 / 2

= $77,500

Therefore,

The unadjusted rate of return based on the average cost of investment :

= $25,730 / $77,500 *100

= 33.2%