Question

Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $175,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $35,000. 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% 0.943 1.833 2.673 3.465 0.909 1.736 2.487 3.170 4.212 3.791 0.893 0.870 0.833 1.690 1.626 1.528 2.402 2.283 2.106 3.037 2.855 2.589 3.605 3.353 2.991 4.111 3.785 3.326 4.564 4.160 3.605 4.968 4.487 3.837 5.328 4.772 4.031 5.6505.0194.192 4.917 5.582 6.210 6.802 107.360 4.355 4.868 5.335 5.759 6.145 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. 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 Amount to be invested Net present value

Answer 1

Annual net cash flows	35000
Less: Depreciation expense	17500	=175000/10
Annual Net Operating income	17500
a
Annual Net Operating income	17500
Divide by Average Investment	87500	=175000/2
Average rate of return	20%
b
Investment cost	175000
Divide by Annual net cash flows	35000
Cash payback period	5
c
Present value of Annual net cash flows	197750	=35000*5.650
Amount to be invested	175000
Net present value	22750