Question

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

Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $544,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $68,000. The company’s minimum desired rate of return for net present value analysis is 12%.

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, 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.
%

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 minus 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

SEE IMAGES

projects (Autosaved) (Autosaved) (Autosaved) Microsoft Excel Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum ー E " ゴWrap Text ta copy ▼ в 1 프 . Ej- 2, Δ. :rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Formsat Sort &Find & 2 ClearFe Select Edting Format Painter Formatting, as Table w styles. ▼ ㆆ ▼ Clipboard Alignment Number Cells 58 59 60 61 62 63 64 65 COST OF EQUIPMENT CFAT LIFE 544000 68000 10 YEARS AVERAGE RATE OF RETURN AVERAGE PROFIT/AVERAGE INVESTMENT) X100 CFAT DEPRECIATION (544000/10) AVERAGE PROFIT 68000 54400 LESS 67 68 69 70 71 72 73 74 75 Ready Circular References: ED12 13600 INVESTMENT/2 544000/2 272000 AVERAGE INVESTMENT- AVERAGE RATE OF RETURN= 5.0% 13600/272000 100 4AHL REPLACEMENT S HPR GMAMEAC MACRS ERATIOS CASH BUDGET BOND EPS EBIT REPLACEMENT wacc bond Sheet? Sheet1 / STats | NPV | BETA LE | 140% | 01-05-2018

projects (Autosaved) (Autosaved) (Autosaved) Microsoft Excel Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum ー E " ゴWrap Text ta copy ▼ в 1 프 . Ej- 2, Δ. :rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Formsat Paste Sort &Find & 2 ClearFe Select Edting Format Painter Formatting, as Table w styles. ▼ ㆆ ▼ Clipboard Font Alignment Number Cells V91 75 76 CASH PAYBACK PERIOD - 8 YEARS INVESTMENT/AVERAGE CFAT) 544000/68000 78 79 80 81 82 83 84 85 86 87 NET PRESENT VALUE PV OF ANNUAL CFAT (CFATX PVI FA @ 12%, 10 YEARS) (68000 X 5.65) LESS: AMOUNT TO BE INVESTED 384200 544000 NET PRESENT VALUE 159800 89 90 91 92 Ready Circular References: ED12 4AHL REPLACEMENT S HPR GMAMEAC MACRS ERATIOS CASH BUDGET BOND EPS EBIT REPLACEMENT wacc bond Sheet? Sheet1 / STats | NPV | BETA LE | 140% | 01-05-2018

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