Great Plains Transportation Inc. is considering acquiring equipment at a cost of
ID: 2462172 • Letter: G
Question
Great Plains Transportation Inc. is considering acquiring equipment at a cost of $285,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $57,000. 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 3.352 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 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.
________ 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 $______________
Explanation / Answer
Cost of Equipment 285,000.00 Life in years 10.00 Depreciation per year = 285000/10 28,500.00 Net Cash Flows 57,000.00 Less Depreciation 28,500.00 Profit after tax 28,500.00 Average Rate of return = Profit after tax/ Investment Average Rate of return = 28,500/285,000 Average Rate of return = 10% PBP Time Amount Cumulative - (285,000.00) (285,000.00) 1.00 57,000.00 (228,000.00) 2.00 57,000.00 (171,000.00) 3.00 57,000.00 (114,000.00) 4.00 57,000.00 (57,000.00) 5.00 57,000.00 - 6.00 57,000.00 57,000.00 7.00 57,000.00 114,000.00 8.00 57,000.00 171,000.00 9.00 57,000.00 228,000.00 10.00 57,000.00 285,000.00 PBP= 5 Years Statemnet showing Cash flows Particulars Time PVf@12% Amount PV Cash Outflows - 1.00 (285,000.00) (285,000.00) PV of Cash outflows (285,000.00) Cash inflows 1-10 5.6500 57,000.00 322,050.00 PV of Cash Inflows 322,050.00 NPV 37,050.00 Present value of annual net cash flows $ 322,050.00 Less amount to be invested $ 285,000.00 Net present value $ 37,050.00
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