Question

Payback and ARR

Each of the following scenarios is independent. All cash flows are after-tax cash flows.

Required:

1. Brad Blaylock has purchased a tractor for $86,250. He expects to receive a net cash flow of $29,750 per year from the investment. What is the payback period for Jim? Round your answer to two decimal places.
years

2. Bertha Lafferty invested $377,500 in a laundromat. The facility has a 10-year life expectancy with no expected salvage value. The laundromat will produce a net cash flow of $105,000 per year. What is the accounting rate of return? Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box).
%

3. Melannie Bayless has purchased a business building for $338,000. She expects to receive the following cash flows over a 10-year period:

Year 1: $45,000

Year 2: $55,000

Year 3-10: $81,400

What is the payback period for Melannie? Round your answer to one decimal place.
years

What is the accounting rate of return? Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box).
%

Answer 1

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Question 1
Payback Period		86250/29750	$                  2.90	Year
Question 2
Accounting Rate of Return		Average Profit/Average Investment	67250/377500	17.81%
Cash Flow			$       105,000.00
Less: Depreciation		377500/10	$         37,750.00
Profit			$         67,250.00
Question 3
	Year	Cash Inflow	Cummulative Cash Inflow
	1	$                                              45,000	$              45,000
	2	$                                              55,000	$            100,000
	3	$                                              81,400	$            181,400
	4	$                                              81,400	$            262,800
	5	$                                              81,400	$            344,200
	6	$                                              81,400	$            425,600
	7	$                                              81,400	$            507,000
	8	$                                              81,400	$            588,400
	9	$                                              81,400	$            669,800
	10	$                                              81,400	$            751,200
Payback Period	Years before Recovery	+	Unrecovered Cost at start of the year/Cash Flow during the Next year
	Years before Recovery	4
	Unrecovered Cost	338000-262800	$              75,200
	Cash Flow during year 5	344200-262800	$              81,400
Payback Period	4+(75200/81400)
	4.92	Years
Accounting Rate of Return
	Year	Cash Inflow	Less Dep	Net Profit
	1	$                                              45,000	$         37,750.00	$    7,250.00
	2	$                                              55,000	$         37,750.00	$ 17,250.00
	3	$                                              81,400	$         37,750.00	$ 43,650.00
	4	$                                              81,400	$         37,750.00	$ 43,650.00
	5	$                                              81,400	$         37,750.00	$ 43,650.00
	6	$                                              81,400	$         37,750.00	$ 43,650.00
	7	$                                              81,400	$         37,750.00	$ 43,650.00
	8	$                                              81,400	$         37,750.00	$ 43,650.00
	9	$                                              81,400	$         37,750.00	$ 43,650.00
	10	$                                              81,400	$         37,750.00	$ 43,650.00
		Total		$373,700.00
		Average	Total/10	$        37,370
Accounting Rate of Return		Average Profit/Average Investment	37370/338000	11.06%