12.14 Average rate of return, cash payback period, net present value method for a service company

The St. Louis to Seattle Railroad is considering acquiring equipment at a cost of $3,600,000. The equipment has an estimated life of 8 years and no residual value. It is expected to provide yearly net cash flows of $750,000. The companys minimum desired rate of return for net present value analysis is 12%.

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. Round to one decimal place.

???

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

Line Item Description	Amount
Present value of annual net cash flows	?
Amount to be invested	?
Net present value	?