Question

Vernon Rentals can purchase a van that costs $185,000; it has an expected useful life of five years and no salvage value. Vernon uses straight-line depreciation. Expected revenue is $67,155 per year. Assume that depreciation is the only expense associated with this investment.

Required

1. Determine the payback period. (Round your answer to 1 decimal place.)

2. Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)   

3. 

   a. Payback period b. Unadjusted rate of return years

Answer 1

Ans. A	Payback period = Initial investment / Annual cash inflows
	$185,000 / $67,155
	2.8 years
Ans. B	Un adjusted rate of return = (Annual cash inflows - Depreciation) / Average investment * 100
		($67,155 - $37,000) / $92,500 * 100
		$30,155 / $92,500 * 100
		32.6%
	*Depreciation = (Cost of asset - Salvage value) / useful life
	($185,000 - 0) / 5
	$37,000
	*Average investment = (Initial investment + Salvage value) / 2
	($185,000 + 0) / 2
	$92,500