Textbook Problem

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 $1,250,000. The equipment has an estimated life of eight years and no residual value. It is expected to provide yearly net cash flows of $312,500. The company’s minimum desired rate of return for net present value analysis is 12%.

Compute the following:

1. A. The average rate of return, giving effect to straight-line depreciation on the investment.
2. B. The cash payback period.
3. C. The net present value. Use the present value of an annuity table appearing in Exhibit 5 of this chapter.