Question

Each of the following scenarios is independent. All cash flows are after-tax cash flows.

Required:

1. Brad Blaylock has purchased a tractor for $90,000. He expects to receive a net cash flow of $32,500 per year from the investment. What is the payback period for Jim? Round your answer to two decimal places. _____years

2. Bertha Lafferty invested $382,500 in a laundromat. The facility has a 10-year life expectancy with no expected salvage value. The laundromat will produce a net cash flow of $100,000 per year. What is the accounting rate of return? Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box). ___%

3. Melannie Bayless has purchased a business building for $336,000. She expects to receive the following cash flows over a 10-year period:

Year 1: $42,000

Year 2: $57,500

Year 3-10: $89,800

What is the payback period for Melannie? Round your answer to one decimal place. ___years

What is the accounting rate of return? Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box). _____%

Answer 1

1. Payback Period = Initial Investment/Annual Cash Flows = 90,000/32,500 = 2.77 years

2. ARR = Average Net Profit/Average Investment = 100,000/382,500 = 26%

3. Average CF/Year = 81,790
ARR = Average Net Profit/Average Investment = 81,790/336,000 = 24%

Year	Cash Flow	Cumulative CF	Payback
0	-336000	-336000
1	42000	-294000
2	57500	-236500
3	89800	-146700
4	89800	-56900	4.63
5	89800
6	89800
7	89800
8	89800
9	89800
10	89800