Average Rate of Return, Cash Payback Period, Net Present Value Method

Southwest Transportation Inc. is considering a distribution facility at a cost of $10,000,000. The facility has an estimated life of 10 years and a $2,000,000 residual value. It is expected to provide yearly net cash flows of $2,500,000. The companys minimum desired rate of return for net present value analysis is 15%.

Click here to access the present value tables (Exhibit 2 and Exhibit 5) to use for this problem.

a. Compute average rate of return, giving effect to straight-line depreciation on the investment. Round to one decimal place. __________%

b. Compute the cash payback period.

__________________

c. Compute the net present value.

Total present value of the investment	$__________
Less: amount to be invested	___________
Equals: net present value	$__________