Question

# Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1....

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). _____%

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

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