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 $350,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $70,000. The company's minimum desired rate of return for net present value analysis is 15%. Present Value of an Annuity of S1 at Compound Interest 10% 0.909 1.833 1.736 1.690 Year 1596 0.870 1.626 2.673 2.487 2.402 2.283 3.465 3.170 3.037 2.855 5 3.352 3.784 4.160 4.487 2096 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.772 4.031 4.192 6% 1296 0.943 0.893 3.60 4.212 3.791 4.917 4.355 4.111 5.582 4.868 .564 6.210 5.335 4.968 6.802 5.759 5.328 7.360 6.145 5.650 9 10 5.019 Compute thefollowing 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 Select 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 annual net cash flows Less amount to be invested Net present value

Explanation / Answer

a) Average rate of return = net income *100/intial investment

= 35000*100/350000

Average rate of return = 10%

net income = 70000-(350000/10)=35000

b) Payback period = initial investment/annual cash flow

= 350000/70000

Payback period = 5 years

c) Calculate net present value :

Present value of annual cash flow (70000*5.019) 351330 Less: Amount to be invested (350000) Net present value 1330

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