Question

Payback and ARR Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Brad Blaylock has purchased a tractor for $96,250. He expects to receive a net cash flow of $32,500 per year from the investment. What is the payback period for Jim? Round your answer to two decimal places. 2.96 years 2. Bertha Lafferty invested $357,500 in a laundromat. The facility has a 10-year life expectancy with no expected salvage value The laundromat will produce a net cash flow of $117,000 per year. What is the accounting rate of return? Enter your answer as whole percentage value (for example, 16% should be entered as "16" in the answer box). 23 % 3. Melannie Bayless has purchased a business building for $337,000. She expects to receive the following cash flows over a 10- year period: Year 1: $42,500 Year 2: $57,500 Year 3-10: $86,400 What is the payback period for Melannie? Round your answer to one decimal place. years What is the accounting rate of return? Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box).

Answer 1

Problem 3

Solution:

Payback period is the length of time within which proposed initial investment is returned back to the company.

Payback period is calculated by taking two type of cash flows (1) Uniform Cash Flow each year and (2) Different Cash Flow each year

In the question given, cash flow falls in type (2). SO we need to find out the accumulated cash flow as follows:

Year	Cash Flows	Accumulated Cash Flow
1	$42,500	$42,500
2	$57,500	$100,000
3	$86,400	$186,400
4	$86,400	$272,800
5	$86,400	$359,200
6	$86,400	$445,600
7	$86,400	$532,000
8	$86,400	$618,400
9	$86,400	$704,800
10	$86,400	$791,200
	$791,200

Initial Investment = $337,000

From the above table, it is clear that the $337,000 will be recovered by the company between year 4 & 5. It means the payback period should be somewhere between Year 4 & 5.

Payback Period = Year 4 + ($337,000 – Already recovered amount till Year 4 i.e. $275,800) / Cash Flow of Year 5 i.e. $86,400

= 4 Years + 0.74 Years

= 4.74 Years or 4.7 Years

4)

Accounting Rate of Return = Average Annual Net Income / Initial Investment x 100

= $45,420 / $337,000x 100

= 13.5%

Year	Cash Flows	Less: Depreciation	Net Income
1	$42,500	$33,700	$8,800
2	$57,500	$33,700	$23,800
3	$86,400	$33,700	$52,700
4	$86,400	$33,700	$52,700
5	$86,400	$33,700	$52,700
6	$86,400	$33,700	$52,700
7	$86,400	$33,700	$52,700
8	$86,400	$33,700	$52,700
9	$86,400	$33,700	$52,700
10	$86,400	$33,700	$52,700
			$454,200
Average Annual Net Income ($454,200 / 10)			$45,420

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