Question

Average Rate of Return, Cash Payback period, Net Present Value Method Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $260,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $65,000. The company's minimum desired rate of return for net present value analysis is 15%. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.9090 .893 0.870 0.833 1.833 1.690 1.528 1.736 2.487 2.106 2.673 3.465 4.212 3.170 3.791 1.626 2.283 2.855 3.353 3.785 4.160 2.402 3.037 3.605 4.111 4.564 4.968 2.589 2.991 4.917 4.355 3.326 5.582 4.868 6.210 5.335 4.487 4.772 3.605 3.837 4.031 4.192 6.802 7.360 5.759 6.145 5.328 5.650 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

Answer 1

Net cash flow	65000
Less: Depreciation	26000	=260000/10
Annual net income	39000
a
Annual net income	39000
Divide by Average investment	130000	=260000/2
Average rate of return	30%
b
Investment cost	260000
Divide by Annual net cash flow	65000
Cash payback period	4	years
c
Present value of Annual net cash flows	326235	=65000*5.019
Less amount to be invested	260000
Net present value	66235