12-5B. Cash Payback, Average Rate of Return, and Net Present Value Methods Lyle Company is con- sidering whether to enter into a franchise agreement that would give the company exclusive distribu- tion rights in a three-state region to a quality line of leisure spas. The franchise agreement will extend eight years and cost $600,000. There is no salvage value. The franchise cost will be amortized on a straight-line basis over eight years on both the books and the tax return. The following annual results are expected if the franchise is acquired: $230,000 Increase in annual cash revenue Increase in expenses: Cash operating expenses. Amortization Pretax income.. Income tax expense (35%). Net income.. $95,000 75,000 170,000 $ 60,000 21,000 $ 39,000 Lyle uses a 12% hurdle rate when analyzing capital expenditure proposals using net present value. N 0 P B D E G H 28 A What are the annual net cash flows (net inflows) from this project? 29 Increase in annual cash revenue 30 Less: Increase in cash operating expenses 31 Increase in income tax expense 32 Annual net cash inflows 33 34 B. Compute the cash payback period 35 Initial Investment/Annual Net Cash Inflows Cash Payback Period 36 37 38 C. Compute the average rate of return 39 Average Annual Net Income from Investment = Average Rate of Return 40 Average Investment 41 42 44 45 D. Compute the net present value and indicate whether positive or negative 46 Present value 47 48 Investment required 50 51 52 E Compute the internal rate of return 53 Sheet1