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%*

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