Garrison Rentals can purchase a van that costs $54,000, it has an expected usefu
ID: 2517841 • Letter: G
Question
Garrison Rentals can purchase a van that costs $54,000, it has an expected useful life of three years and no salvage value Garrison uses straight-line depreciation. Expected revenue is $36,000 per year. Assume that depreciation is the only expense associated with this investment Required a. Determine the payback period. (Round your answer to 1 decimal place.) b. Determine the unadjusted rate of return based on the average cost of the investment (Round your answer to i decimal place. 234 should be entered as 23.4)) a Payback period b Unadjusted rate of return years CPrey 6of 13 Next ???@e w? o searchhExplanation / Answer
Answer a.
Cost of Van = $54,000
Annual Revenue = $36,000
Payback Period = Cost of Van / Annual Revenue
Payback Period = $54,000 / $36,000
Payback Period = 1.50 years
Answer b.
Cost of Van = $54,000
Annual Revenue = $36,000
Useful Life = 3 years
Annual Depreciation = Cost of Van / Useful Life
Annual Depreciation = $54,000 / 3
Annual Depreciation = $18,000
Net Income = Annual Revenue - Annual Depreciation
Net Income = $36,000 - $18,000
Net Income = $18,000
Average Investment = (Cost of Van + Salvage Value) / 2
Average Investment = ($54,000 + $0) / 2
Average Investment = $27,000
Rate of Return = Net Income / Average Investment
Rate of Return = $18,000 / $27,000
Rate of Return = 0.6667
Rate of Return = 66.67%
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