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Broward College l Browa (E) Homepage-BCOnline x , CengageNow I Onkne- . New Tab x O sjc.cengagenow.com/ilrm eAssignmentMain.do?takeAssignmentSessionLocator assignment-take Averaqe Rate of Return, Cash Payback Period, Net Present Value Method 8. 9. 10. O Great Plains Transportation Inc. is considering acquiring equipment at a cost of $160,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $40,000. 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 Year 6% 1090 12vo 15% 20% 0.943 0.909 0.893 0.870 0.833 1.626 1.528 2.283 2.106 3.465 3.170 3.037 2.8552.589 2.991 4.917 4.355 4.111 3.784 3.326 5.582 4.868 .5644.160 3.605 6.210 5.335 4.968 4.487 3.837 5.328 4.772 4.031 5.650 5.019 4.192 1.833 1.736 1.690 2.673 2.487 2.402 4.212 3.791 3.605 3.352 6.802 5.759 10 7.360 6.145 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. 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 O Type here to search 7-19 PM 12/7/2017

Explanation / Answer

Equipment Cost = $160,000, Residual value = 0

Estimated life = 10 years, Net Cash flows = $40,000

Desired Rate of return = 15%

Depreciation = 160,000 / 10 = $16,000

Annual Net Income = $40,000 - $16,000 = $24,000

(1) Average Rate of Return = (Net Income / Average Investment) * 100 = (24,000 / 160,000) * 100 = 15%

(2) Cash payback period = Initial Investment / Annual cash flows = 160,000 / 40,000 = 4 years

(3) PV of cashflows = Annual cash flows * PVAF(15% for 10 years) = 40,000 * 5.019 = $200,760

Less : Amount to be invested = ($160,000)

NPV = $40,760

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