Question

# Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company Spanish...

Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company

Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of \$1,250,000. The equipment has an estimated life of eight years and no residual value. It is expected to provide yearly net cash flows of \$312,500. The company’s minimum desired rate of return for net present value analysis is 12%.

 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, giving effect to straight-line depreciation on the investment. If required, round your answer to one decimal place.
%

b. The cash payback period.

c. The net present value. Use the above table of the present value of an annuity of \$1. Round to the nearest dollar.

 Present value of annual net cash flows \$ Amount to be invested \$ Net present value \$

 Annual cashh inflows 312500 Less: Annual depreciation 156250 (1250000/8) Annual net income 156250 Divide: Average investment 625000 (1250000*1/2) Average rate of return 25% Payback period: Investment / Annual cash inflows 1250000/312500 = 4 years Annual Cash inflows 312500 Annuity PVF at 12% for 8 years 4.968 Present value of inflows 1552500 Less: Investment 1250000 Net Present value 302500

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