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%.
| 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 straight-line depreciation on the investment. If required, round your answer to one decimal place.
%
b. The cash payback period.
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 |
$ |
| Less amount to be invested |
$ |
| Net present value |
$ |