1. Average Rate of ReturnNew Product

Hana Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 10,000 units at $300 per unit. The equipment has a cost of $4,500,000, residual value of $500,000, and a 10-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows:

Cost per unit:
	Direct labor	$ 18.00
	Direct materials	90.00
	Factory overhead (including depreciation)	112.00
	Total cost per unit	$220.00

Determine the average rate of return on the equipment. fill in the blank 1 %

2.

Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company

Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $1,250,000. The equipment has an estimated life of eight years and no residual value. It is expected to provide yearly net cash flows of $312,500. The companys 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. fill in the blank 1%

b. The cash payback period.

3 years4 years5 years6 years7 years

c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar.

Present value of annual net cash flows	$fill in the blank 3
Amount to be invested	$fill in the blank 4
Net present value	$fill in the blank 5