Question

Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $208,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $52,000. 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. If required, use a minus sign to indicate negative net
present value for current grading purpose.

Present value of annual net cash flows | $ |

Amount to be invested | $ |

Net present value | $ |

Answer #1

A project is estimated to cost $77,766 and provide annual net
cash flows of $26,000 for five years.
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...

A project is estimated to cost $191,850 and provide annual net
cash flows of $50,000 for eight years.
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
3.352
2.991
6
4.917
4.355
4.111
3.784
3.326
7
5.582
4.868
4.564
4.160
3.605
8
6.210
5.335
4.968...

A project is estimated to cost $454,730 and provide annual net
cash flows of $74,000 for 10 years.
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
3.352
2.991
6
4.917
4.355
4.111
3.784
3.326
7
5.582
4.868
4.564
4.160
3.605
8
6.210
5.335
4.968...

A project has estimated annual net cash flows of $12,500 for ten
years and is estimated to cost $37,500. Assume a minimum acceptable
rate of return of 20%. Use the Present Value of an Annuity
of $1 at Compound Interest table below.
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...

Average Rate of Return, Cash Payback Period, Net Present Value
Method
Bi-Coastal Railroad Inc. is considering acquiring equipment at a
cost of $128,000. The equipment has an estimated life of 10 years
and no residual value. It is expected to provide yearly net cash
flows of $64,000. 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...

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%...

Cash Payback Period, Net Present Value Analysis, and Qualitative
Considerations The plant manager of Shenzhen Electronics Company is
considering the purchase of new automated assembly equipment. The
new equipment will cost $375,000. The manager believes that the new
investment will result in direct labor savings of $75,000 per year
for 10 years.
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...

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...

project has estimated annual net cash flows of $70,000 for four
years and is estimated to cost $190,000. Assume a minimum
acceptable rate of return of 10%. Use the The sum of the
present values of a series of equal “Net cash flows” to be received
at fixed time intervals.Present Value of an Annuity of $1 at
Compound Interest table below.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909...

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 $144,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
cash flows of $72,000. 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%...

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