12.14 Average rate of return, cash payback period, net present value method for a service...
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12.14 Average rate of return, cash payback period, net present value method for a service company
The St. Louis to Seattle Railroad is considering acquiring equipment at a cost of $3,600,000. The equipment has an estimated life of 8 years and no residual value. It is expected to provide yearly net cash flows of $750,000. The companys minimum desired rate of return for net present value analysis is 12%.
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. Round to one decimal place.
???
b. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar.
Line Item Description
Amount
Present value of annual net cash flows
?
Amount to be invested
?
Net present value
?
Answer & Explanation
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