9 Computing the payback period and unadjusted rate of return for the same investment opportunity LO 16-4

Norman Rentals can purchase a van that costs $132,000; it has an expected useful life of four years and no salvage value. Norman uses straight-line depreciation. Expected revenue is $54,780 per year. Assume that depreciation is the only expense associated with this investment.

Required
a.	Determine the payback period. (Round your answer to 1 decimal place.)

PAYBACK PERIOD ( ) YEARS

b.

Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)

UNADJUSTED RATE OF RETURN ( ) %

8 Determining the payback period LO 16-4

Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $13,800,000; it will enable the company to increase its annual cash inflow by $6,000,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $29,700,000; it will enable the company to increase annual cash flow by $9,900,000 per year. This plane has an eight-year useful life and a zero salvage value.

Required
a-1.	Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)

PAYBACK PERIOD

ALTERNATIVE 1 YEARS

ALTERNATIVE 2 YEARS

a-2.

Identify the alternative Bailey should accept if the decision is based on the payback approach.

Alternative 1 ( )

Alternative 2 ( )

7 Determining the internal rate of return LO 16-3

Merton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the companys cash outflow for operating expenses by $1,290,000 per year. The cost of the equipment is $6,408,255.60. Merton expects it to have a 8-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

a.

Calculate the internal rate of return of the investment opportunity. INTEREST RATE OF RETURN ( ) 6 Determining the cash flow annuity with income tax considerations LO 16-2 To open a new store, Linton Tire Company plans to invest $342,000 in equipment expected to have a six -year useful life and no salvage value. Linton expects the new store to generate annual cash revenues of $323,000 and to incur annual cash operating expenses of $187,000. Lintons average income tax rate is 30 percent. The company uses straight-line depreciation. Required Determine the expected annual net cash inflow / outflow for each of the first four years after Linton opens the new store. (Negative amounts should be indicated by a minus sign.) NET CASH INFLOW/OUTFLOW YEAR 1 YEAR 2 YEAR 3 YEAR 4