EX 10-14 Average rate of return, cash payback period, net present value method f

Question

EX 10-14 Average rate of return, cash payback period, net present value method for a service company Bi-Coastal Railroad Inc. Is considering acquiring equipment at a cost of $520,000. The equipment has an estimated life of eight years and no residual value. It is expected to provide yearly net cash flows of $104,000. The company's minimum desired rate of return for net present value analysis is 10%. Compute the following: The average rate of return, giving effect to straight-line depreciation on investment, The cash payback period. The net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). Round to the nearest dollar.

Explanation / Answer

  PARTICULARS YEAR CASH FLOW DISCOUNTING FACTOR PRESENT VALUE

EQUIPMENT ACQUIRED 0 (520000) 1 (520000)

NET CASH FLOWS 1-8 104000 5.335 554840

(C) NPV $34840

DEPRECIATION = 520000/8

   = $65000

AVRAGE PROFIT AFTER DEPRECIATION = NET CASH FLOWS + DEPRECIATION

   = 104000 + 65000

   = $169000

AVERAGE INVESTMENT = 520000/2 = $260000

AVERAGE RATE OF RETURN = AVRAGE PROFIT AFTER DEPRECIATION / AVERAGE INVESTMENT

   = 169000/260000

(A) = 65%

CASH PAYBACK PERIOD = CUMULATIVE NET CASH FLOWS OF 5 YEARS

= 104000 * 5

   = 520000 = ORIGINAL INVESTMENT

(B) = 5 YEARS

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