1. Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company

   Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $135,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $27,000. The company's minimum desired rate of return for net present value analysis is 10%.

   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. If required, round your answer to one decimal place. fill in the blank 1%

   b. The cash payback period.

   2 years3 years4 years5 years6 years7 years8 years

   c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value for current grading purpose.

   Present value of annual net cash flows	$fill in the blank 3
   Amount to be invested	$fill in the blank 4
   Net present value	$fill in the blank 5

2. Net Present Value MethodAnnuity for a Service Company

   Amenity Hotels Inc. is considering the construction of a new hotel for $81 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $25 million per year. Total expenses, including depreciation, are expected to be $18 million per year. Amenity Hotels management has set a minimum acceptable rate of return of 12%.

   a. Determine the equal annual net cash flows from operating the hotel. Enter your answer in million. Round your answer to two decimal places. $fill in the blank 1 million

   Present Value of an Annuity of $1 at Compound Interest
   Periods	8%	9%	10%	11%	12%	13%	14%
   1	0.92593	0.91743	0.90909	0.90090	0.89286	0.88496	0.87719
   2	1.78326	1.75911	1.73554	1.71252	1.69005	1.66810	1.64666
   3	2.57710	2.53129	2.48685	2.44371	2.40183	2.36115	2.32163
   4	3.31213	3.23972	3.16987	3.10245	3.03735	2.97447	2.91371
   5	3.99271	3.88965	3.79079	3.69590	3.60478	3.51723	3.43308
   6	4.62288	4.48592	4.35526	4.23054	4.11141	3.99755	3.88867
   7	5.20637	5.03295	4.86842	4.71220	4.56376	4.42261	4.28830
   8	5.74664	5.53482	5.33493	5.14612	4.96764	4.79677	4.63886
   9	6.24689	5.99525	5.75902	5.53705	5.32825	5.13166	4.94637
   10	6.71008	6.41766	6.14457	5.88923	5.65022	5.42624	5.21612

   b. Compute the net present value of the new hotel, using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value. Net present value of hotel project: $fill in the blank 2 million

   c. Does your analysis support construction of the new hotel?

   Yes or No, because the net present value is positive or negative

   .