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. 2

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   years

   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	$

   Feedback

   a. Divide the estimated average annual income by the average investment. Net cash flow less the annual depreciation expense equals average annual income. Investment cost divided by two equals average investment.

   b. Divide the amount to be invested by the annual net cash inflow.

   c. Subtract the cost from the present value of the annual net cash flow. (Use the present value of an annuity factor for 10 periods at 15%, Exhibit 5.)

   Learning Objective 2, Learning Objective 3.