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Average Rate of Return, Cash Payback Period, Net Present Value Method

Southwest Transportation Inc. is considering a distribution facility at a cost of $315,000. The facility has an estimated life of 10 years and a no residual value. It is expected to provide yearly net cash flows of $63,000. The companys minimum desired rate of return for net present value analysis is 10%.

Click here to access the present value tables (Exhibit 2 and Exhibit 5) to use for this problem.

a. Compute average rate of return, giving effect to straight-line depreciation on the investment. Round to one decimal place. %

b. Compute the cash payback period. years

c. Compute the net present value. If required, use the minus to indicate a negative net present value.

Total present value of annual net cash flows	$
Less: amount to be invested
Equals: net present value	$

Exhibit 5 Partial Present Present Value of an Annuity of $1 at Compound Interest Value of an Year 6% 10% 12% 15% 20% Annuity Table 1 0.943 0.909 0.893 0.870 0.833 1.833 1.736 1.690 1.626 1.528 2.673 3 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 3.791 5 4.212 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 4.564 3.605 7 5.582 4.868 4.160 8 6.210 5.335 4.968 4.487 3.837 4.031 9 6.802 5.759 5.328 4.772 5.650 5.019 10 7.360 6.145 4.192 Exhibit 2 Present Value of $1 at Compound Interest Partial Present Value of Year 12% 20% 6% 10% 15% $1 Table 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 0.75 3 0.840 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 0.558 0.386 10 0.322 0.247 0.162

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