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 $90,000. He expects to receive a net cash flow of $32,500 per year from the investment. What is the payback period for Jim? Round your answer to two decimal places. years

2. Bertha Lafferty invested $382,500 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 $100,000 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). 26 %

3. Melannie Bayless has purchased a business building for $336,000. She expects to receive the following cash flows over a 10-year period:

Year 1: $42,000

Year 2: $57,500

Year 3-10: $89,800

3a. What is the payback period for Melannie? Round your answer to one decimal place.

____years

3b. 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). 24 %

Answer 1

1) cash flow per year , c = 32,500

investment , I = 90,000

let the payback period = n

n = I/c = 90000/32500 = 2.76923 or 2.77 years

2)

average of cash flow , C= $100,000

annual depreciation , d = investment/life expectancy = 382,500/10 = 38250

ARR =( C-d)/investment = (100,000 - 38,250)/382,500 = 0.161437 or 16.14%

3)