Question

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 | $ |

Answer #1

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 | |||

Average Rate of Return, Cash Payback Period, Net Present Value
Method for a Service Company
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at a cost of $144,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
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for net present value analysis is 12%.
Present Value of an Annuity of $1 at
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Year
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Average Rate of Return, Cash Payback Period, Net Present Value
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Year
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Present Value of an Annuity of $1 at
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Year
6%
10%
12%
15%
20%
1
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Average Rate of Return, Cash Payback Period, Net Present Value
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Bi-Coastal Railroad Inc. is considering acquiring equipment at a
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Year
6%
10%
12%
15%
20%
1
0.943
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Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
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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
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3.465
3.170
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2.855
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Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
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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
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12%
15%
20%
1
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0.870
0.833
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