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Average Rate of Return, The expected period of time that will elapse between the date of a capital expenditure and the complete recovery in cash

  1. Average Rate of Return, The expected period of time that will elapse between the date of a capital expenditure and the complete recovery in cash (or equivalent) of the amount invested.Cash Payback Period, A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.Net Present Value Method for a Service Company

    Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $110,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $55,000. The company's minimum desired rate of return for net present value analysis is 15%.

    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.

    %

    b. The cash payback period.

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    c. The net present value. Use the above table of the The sum of the present values of a series of equal Net cash flows to be received at fixed time intervals.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 $
    Amount to be invested $
    Net present value $

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