Norman Rentals can purchase a van that costs $45,000; it has an expected useful

Question

Norman Rentals can purchase a van that costs $45,000; it has an expected useful life of three years and no salvage value. Norman uses straight-line depreciation. Expected revenue is $25,000 per year. Assume that depreciation is the only expense associated with this investment.

Determine the payback period. (Round your answer to 1 decimal place.)              1.8

Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)

??

Determine the payback period. (Round your answer to 1 decimal place.)              1.8

Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)

??

Explanation / Answer

a)

Payback Period = Initial Investment/Annual Cash flow

Payback Period = 45000/25000

Payback Period = 1.8 years

b)

Average Investment = (Initial investment + Salvage Value)/2

Average Investment = (45000+0)/2

Average Investment = 22500

Annual Depreciation = (Initial investment - Salvage Value)/Useful life

Annual Depreciation = (45000-0)/3

Annual Depreciation = 15000

Average Annual Net Income = Annual Revenue - Annual Depreciation

Average Annual Net Income = 25000-15000

Average Annual Net Income = 10000

Unadjusted rate of return = Average Annual Net Income/Average Investment

Unadjusted rate of return = 10000/22500

Unadjusted rate of return = 44.4%

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

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