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 $264,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $66,000. The company's minimum desired rate of return for net present value analysis is 15% Present Value of an Annuity of $1 at Compound Interest 15% 0.870 1.626 2.283 2.855 3.352 3.784 12% 0.893 1.690 10% 0.909 1.736 2.487 2.402 20% 0.833 1.528 2.106 2.589 2.991 3.326 Year 6% 0.943 1.833 2.673 3.465 3.170 3.037 4.212 3.791 4.917 4.355 3.605 5.582 4.868 4.564 4.160 3.605 6.210 5.335 4.968 4.4873.837 6.802 5.759 5.328 4.772 4.031 7.360 6.145 5.650 5.019 4.192 9 10

Explanation / Answer

a.    Average rate of return on investment: 39600 / (264000 / 2) = 30%

*The annual earnings are equal to the cash flow less the annual depreciation expense, shown as follows:

       $66000 – ($264000/10 years) = $39600

b.    Cash payback period: $264000 / $66000 = 4 years

c.    

Present value of annual net cash flows ($66000 × 5.0119*)

$330785

Less:Amount to be invested

(264000)

Net present value

$66785

            *Present value of an annuity of $1 at 15% for 10 periods from chapter table

Present value of annual net cash flows ($66000 × 5.0119*)

$330785

Less:Amount to be invested

(264000)

Net present value

$66785

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