Question

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 | 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, assuming the
annual earnings are equal to the net cash flows less the annual
depreciation expense on the equipment. If required, round your
answer to one decimal place.

%

**b.** The cash payback period.

years

**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 | $ |

Less amount to be invested | $ |

Net present value | $ |

Answer #1

Annual Depreciation = (128000 – 0)/10 = $12,800

Average Rate of Return = Average Profit / Initial Investment

Average Profit = Net Annual Cash Flow – Annual Depreciation (Since, project has even cash flows)

Average Profit = $64,000 - $12,800 = $51,200

Average Rate of Return = 51200/128000 = 0.40 or 40%

Cash Payback Period = Initial Investment/Net Annual Cash Flows = 128000/64000 = 2 years

Cash Payback Period = 2 years

Present Value of annual net cash flows = Annual Cash Flow * (P/A, 15%, 10)

(P/A, 15%, 10) = 5.019

Present Value of annual net cash flows |
$321,216.00 |

Less Amount to be invested |
$128,000.00 |

Net Present Value |
$193,216.00 |

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...

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%...

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%...

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 $295,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
cash flows of $59,000. The company's minimum desired rate of return
for net present value analysis is 10%.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%...

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 $210,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
cash flows of $42,000. The company's minimum desired rate of return
for net present value analysis is 10%.
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...

Cash Payback Period, Net Present Value Analysis, and Qualitative
Considerations
The plant manager of Shannon Electronics Company is considering
the purchase of new automated assembly equipment. The new equipment
will cost $168,000. The manager believes that the new investment
will result in direct labor savings of $56,000 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...

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...

Net Present Value Method and Internal Rate of Return Method for
a Service Company
Buckeye Healthcare Corp. is proposing to spend $186,725 on an
eight-year project that has estimated net cash flows of $35,000 for
each of the 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...

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...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 12 minutes ago

asked 20 minutes ago

asked 38 minutes ago

asked 51 minutes ago

asked 52 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago