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 $240,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $30,000. The company's minimum desired rate of return for net present value analysis is 10%.

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.
Select2345678Item 2 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 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

Explanation / Answer

Initial Investment =$ 240000 Depreciation = ($ 240000)/10= $ 24000 Annual Inflow after Dep = 30000-24000 = $ 6000 1) Average Rate of Return = $ 6000/240000X100 = 2.5% 2) NPV Annual inflow = $ 30000 Discount rate = 10% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Cash outlflw -240000 Cash inflow 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 -240000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 Discount factor @ 10% 1         0.909         0.826         0.751         0.683         0.621         0.564         0.513         0.467         0.424         0.386 Discounted Cash flow                -2,40,000      27,273      24,793      22,539      20,490      18,628      16,934      15,395      13,995      12,723      11,566 Net Present Value                    -55,663 Present value of Inflow                  1,84,337 Less:- Initial Investment                -2,40,000 NPV                    -55,663 3) Net Cash Payback Period will be beyond year 10 as NPV is negative after year 10.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.