Question

Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $245,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $49,000. The company's minimum desired rate of return for net present value analysis is 15%.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

Compute the following:

a. The average rate of return, giving effect to straight-line depreciation on the investment. If required, round your answer to one decimal place.
%

b. The cash payback period.
5 years

c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value for current grading purpose.

Present value of annual net cash flows	$
Amount to be invested	$
Net present value	$

Answer 1

Annual depreciation = (245000-0)/10 = $24500

Net income = annual cash inflow - depreciation

= 49000-24500 = $24500

a. Average rate of return = average profit / average investment

= 24500/((245000+0)/2) = 20.0%

b. cash payback period = initial investment / annual cash inflow

= 245000/49000 = 5.0 years

c.  Present value of annual cash flows (49000*5.019)            $245931
     Less: Amount to be invested                                              245000
     Net present value                                                               $931