Question

Average Rate of Return, Cash Payback Period, Net Present Value Method Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $352,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $44,000. 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 21 1.626 1.833 1.736 1.690 1.528 2.487 2.673 2.402 2.283 2.106 2.589 3.465 3.170 3.037 2.855 4 2.991 3.605 3.353 3.791 5 4.212 3.785 3.326 4.111 4.355 6 4.917 3.605 4.160 4.564 4.868 5.582 7 3.837 4.487 4.968 5.335 6.210 4.772 4.031 5.328 5.759 6.802 4.192 5.650 5.019 6.145 7.360 10 Compute the following: The average rate of return, assuming the annual earnings are equal to the net cash flows less the annual depreciation expense on the equipment. If required, round your answer to one decimal place. a. b. The cash payback period. 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 min us sign to indicate negative net present value" for current grading purpose. $ Present value of annual net cash flows Less amount to be invested $ Net present value

Answer 1

Ans. A	Average rate of return =   (Annual cash inflow - Depreciation) / Average investment * 100
		($44,000 - $35,200) / $176,000 * 100
		$8,800 / $176,000 * 100
		5.0%
	*Depreciation =   (Cost of equipment - Salvage value) / Useful life
		($352,000 - $0) / 10
		$35,200
	*Average investment =   (Cost of equipment + Salvage value) / 2
		($352,000 + $0) / 2
		$176,000
Ans. B	Cash payback period = Initial investment / Annual cash inflows
		$352,000 / $44,000
		8.00	years
Ans. C	Present value of cash inflow = Annual cash inflows * Present value of an annuity of 1 of 10%
		$44,000 * 6.145
		$270,380
	Present value of cash inflows	$270,380
	Less: Amount to be invested	-$352,000
	Net present value	-$81,620