Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai

Question

Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plains Transportation Inc. is considering acquiring equipment at a cost of $180,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $36,000. 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 3.352 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. Select2345678 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

Answer 1. Average rate of return = Average Accounting Profit / Average Investment Average Accounting profit = $36000 (Net Cash Flow) - $18000 (Dep. - $180000 / 10 Years) Average Accounting profit = $18000 Average rate of return = $18000 / 180000 = 10% Answer 2. Cash Payback Period = Investment / Annual Payback Cash Payback Period = 180000 / 36000 = 5 Years Answer 3. Calculation of NPV of Equipment Particulars Year Amount 15% Factor Present value C D C X D Cash Inflow Net Cash Inflow 1 -10            36,000            5.0190              180,684 A. Total Cash Inflow - PV              180,684 Cash Outflow Cost of Equipment 0          180,000            1.0000              180,000 B. Total Cash Outflow - PV              180,000 NPV (A - B)                      684

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