Average Rate of Return, Cash Payback Period, Net Present Value Method Great Plai

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Average Rate of Return, Cash Payback Period, Net Present Value Method

Great Plains Transportation Inc. is considering acquiring equipment at a cost of $86,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $43,000. The company's minimum desired rate of return for net present value analysis is 12%.

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.
Select2345678Item 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 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 3.352 2.991 6 4.917 4.355 4.111 3.784 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

Explanation / Answer

a) Average rate of return = Net income*100/initial investment

net income = 43000-(86000/10) = 34400

Average rate of return = 34400*100/86000 = 40%

b) Cash payback period = initial investment/annual cash flow

= 86000/43000

Cash payback period = 2 years

c) Net present value :

Present value of annual net cash flow (43000*5.65 242950 Less: AMount to be invested (86000) Net present value 156950

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