Great Plains Transportation Inc. is considering acquiring equipment at a cost of

Question

Great Plains Transportation Inc. is considering acquiring equipment at a cost of $276,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $69,000. The company's minimum desired rate of return for net present value analysis is 15%. Compute the following: The average rate of return, giving effect to straight-line depreciation on the investment. If required, The cash pa/back period. 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

Average Rate of Return Depreciation per year 276000/10 27600 Net Income 69000-27600 $41,400 Average Rate of Return = 41400*100/276000 15% b Payback Period Year Cash Flow Cumulative 0 -276000 -276000 1 69000 -207000 2 69000 -138000 3 69000 -69000 4 69000 0 5 69000 69000 6 69000 138000 7 69000 207000 8 69000 276000 9 69000 345000 10 69000 414000 Payback Period is 4 Years c Net Present Value Present value of Annual Cash Flow 69000*5.019 346311 Less: Amount to be invested 276000 Net Present Value 70311 NPV is $ 70311

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