Compute the following:
a. The average rate of return, giving effect to straight-line depreciation on the investment. Round whole percent to one decimal place.
b. The cash payback period.
c. The net present value. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 2). Round to the nearest dollar.
Answer:
a. Average rate of return on investment: $30,000 *
($450,000 + $0) ÷ 2
* The annual earnings are equal to the cash flow less the annual depreciation expense,
shown as follows:
$75,000 – ($450,000 ÷ 10 years) = $30,000
b. Cash payback period: $
450,000
$75,000
= 6 years
c. Present value of annual net cash flows ($75,000 × 6.145*)………………………… $460,875
Less amount to be invested…………………………………………………………… 450,000
Net present value………………………………………………………………………… $ 10,875
* Present value of an annuity of $1 at 10% for 10 periods from Exhibit 2.
