Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service CompanySpanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $102,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $51,000. The company's minimum desired rate of return for net present value analysis is 12%.Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3532.99164.9174.3554.1113.7853.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192Compute 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.? years c.  The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value for current grading purpose.Present value of annual net cash flows$Amount to be invested$Net present value$

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Asked Dec 2, 2019
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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 $102,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $51,000. 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, giving effect to straight-line depreciation on the investment. 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 $
Amount to be invested $
Net present value $
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Expert Answer

Step 1

a. Compute average rate of return on the investment as shown below:

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Average net profit Average investment Annual net cash flow - Annual depreciation Cost of investment+Residual value Average rate of return- 2 $51,000-$10,200 $102,000+$0 2 $40,800 $51,000 =0.8 (or) 80% Working note: Compute annual depreciation Cost of equipment - Residula value Annual depreciation = Useful life of asset $102,000- $0 10 = $10,200

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Step 2

b.  Compute cash payback period ...

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Intial cost Cash payback period Annual net cash flow $102,000 S51,000 =2 years

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