Great Plains Transportation Inc. is considering acquiring equipment at a cost of
ID: 2562225 • Letter: G
Question
Great Plains Transportation Inc. is considering acquiring equipment at a cost of $60,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $30,000. The company's minimum desired rate of return for net present value analysis is 12% Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 Compute the following: 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. 2 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 valueExplanation / Answer
Cost of Equipment = $60,000
Estimated life = 10 years
Annual Depreciation = Cost of Equipment / Estimated life
Annual Depreciation = $60,000 / 10
Annual Depreciation = $6,000
Annual Cash flows = $30,000
Annual Profit = Annual Cash flows - Annual Depreciation
Annual Profit = $30,000 - $6,000
Annual Profit = $24,000
Answer a.
Annual Profit = $24,000
Average Investment = Cost of Equipment / 2
Average Investment = $60,000 / 2
Average Investment = $30,000
Average Rate of Return = Annual Profit / Average Investment
Average Rate of Return = $24,000 / $30,000
Average Rate of Return = 80.00%
Answer c.
Annual Net Cash flows = $30,000
Present Value of Annual Net Cash flows = Annual Net Cash flows * PV of an annuity of $1 (12%, 10)
Present Value of Annual Net Cash flows = $30,000 * 5.650
Present Value of Annual Net Cash flows = $169,500
Net Present Value = Present Value of Annual Net Cash flows - Amount to be invested
Net Present Value = $169,500 - $60,000
Net Present Value = $109,500
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.