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

Great Plains Railroad Inc. is considering acquiring equipment at a cost of $450,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $75,000. The company's minimum desired rate of return for net present value analysis is 10%.

7/24/2016 CengageNOW | Online teaching and learning resource from Cengage Learning 1. eBook 2. Average Rate of Return, Cash Payback Period, Net Present Value Method 3. Great Plains Railroad Inc. is considering acquiring equipment at a cost of $450,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $75,000. 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 3.352 2.991 6 4.917 4.355 4.111 3.784 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 straightline depreciation on the investment. If required, round your answer to one decimal place. 30 % b. The cash payback period. 6 years c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. Present value of annual net cash flows $ 250950 Less amount to be invested $ 200000 Net present value $ 50850 Hide Feedback Partially Correct Check My Work 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 flow. http://sjc.cengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do 2/3 7/24/2016 CengageNOW | Online teaching and learning resource from Cengage Learning b. Divide the amount to be invested by the annual net cash flow. 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 10%, Exhibit 2.) Learning Objective 2, Learning Objective 3. Hint(s) Check My Work Icon Key Exercise 25-14 Question 1 of 3 mail Intructor ave Cengage Learning http://sjc.cengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do xit umit Aignment for Grading Cengage Technical Support 3/3