Question

a. An asset (investment) costs $289,000, has a twelve-year useful life, and generates net annual cash inflows of $94,000 per year for the first 2 years, and $24,500 per year for the following 10 years. The investment has no residual value. Cash expenses related to this investment are expected to be around $12,000 per year. Calculate the cash payback period for this investment.

b. An asset (investment) costs $390,000, has a twelve-year useful life with no residual value. The investment generates sales revenue $58,000 per year. Cash expenses related to this investment are expected to be around $25,000 per year, and straight-line depreciation expense for the asset is $16,000 per year. Calculate the average rate of return for this investment.

c. Jamie inc. is considering a capital investment (equipment) costing $75,000 with a 6-year useful life, and equal annual net cash flows. The equipment has a net present value, $4,453, calculated at 10%. Find the approximate internal rate of return for this investment.

                                  

d. D'melio, Inc. recently invested in an asset with a 3-year useful life. The net present value was $5,500 and net annual cash flows are estimated to be $5,900 for years 1 through 3. Calculate the original investment in the asset (cost), assuming a 9% minimum desired rate of return (round to nearest $1).

           

Answer 1

a. Calculate the cash payback period for this investment. Year Net Cash flow Cumulative 1 82,000 82,000 2 82,000 164,000 3 12,500 176,500 4 12,500 189,000 5 12,500 201,500 6 12,500 214,000 7 12,500 226,500 8 12,500 239,000 9 12,500 251,500 10 12,500 264,000 11 12,500 276,500 12 12,500 289,000 Initial Investment 289,000 From the above cumulative cash flows it is evident that the payback period is exactly 12 years Hence total payback period is 12.00 Years or 12.0 years