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12.14 Average rate of return, cash payback period, net present value method for a service...

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Accounting

12.14 Average rate of return, cash payback period, net present value method for a service company

The St. Louis to Seattle Railroad is considering acquiring equipment at a cost of $3,600,000. The equipment has an estimated life of 8 years and no residual value. It is expected to provide yearly net cash flows of $750,000. The companys minimum desired rate of return for net present value analysis is 12%.

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. Round to one decimal place.

???

b. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar.

Line Item Description Amount
Present value of annual net cash flows ?
Amount to be invested ?
Net present value ?

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