Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $456,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $57,000. The company's minimum desired rate of return for net present value analysis is 10%.

Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3532.99164.9174.3554.1113.7853.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192

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 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$fill in the blank 3Amount to be invested$fill in the blank 4Net present value$fill in the blank 5

Feedback Area

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 10%, refer Exhibit 5 in the text.)