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 \$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% 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 \$

• All working forms part of the answer
• Requirement [a]
 A Annual net cash flows \$72,000 B Cost of equipment \$144,000 C Resdiual value \$0 D Life [years] 10 E = (B-C)/D Annual Depreciation \$14,400 F = A - E Annual net income \$57,600 G = (B+C)/2 Average investment \$72,000 H = (F/G) x 100 Average rate of return 80.0%

• [b]
 A Cost of equipment \$144,000 B Annual net cash flows \$72,000 C = A/B Cash Payback period 2

• [c]
 A Annual net cash flows \$72,000 B PVA \$1 at 12% for 10th period 5.65 C = A x B Present value of annual net cash flows \$406,800 D Amount to be invested \$144,000 E = C - D Net Present value \$262,800