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%.

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. Round to one decimal place. %

b. The cash payback period. Round to one decimal place.

a)3 years b)4.8 years c)5 years d)6 years e)7 years f)5 years

c. 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