Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Capital Investment Analysis: Spanish Peaks Railroad Inc
Transcribed Image Text:Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company
Spanish Peaks Railroad Inc. is considering acquiring equipment at a cost of $295,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of
$59,000. 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
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
6.802
5.759
5.328
4.772
4.031
10
7.360
6.145
5.650
5.019
4.192
Compute the following:
а.
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
Expert Solution
Step 1
The Average Rate of Return is the average return earned by a company on its investment. The average return takes into account the return earned over the period of life.
Net Present Value is the net of Present cash outflow and inflow. A positive NPV indicates that investment is favorable and negative otherwise.
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