Question

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 $576,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $72,000. The company's minimum desired rate of return for net present value analysis is 10%.

   The sum of the present values of a series of equal cash flows to be received at fixed intervals.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.
   8 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	$

Answer 1

a.
Average rate of return	Average net income/Average investment
Average net income	Net cash flow+Annual depreciation
Annual depreciation	57600	576000/10
Average net income	72000+57600
Average net income	$129,600
Average rate of return	129600/((576000+0)/2)
Average rate of return	45.00%
b.
Payback period	Investment amount/Annual cash flow
Payback period	576000/72000
Payback period	8	years
c.
Calculation of net present value
Net present value	Present value of cash inflow - Present value of cash outflow
Present value of cash inflow	72000*Present value of annuity (n=10,i=10%)
Present value of cash inflow	72000*6.145
Present value of cash inflow	442440
Net present value	442440-576000
Net present value	-$133,560