Chapter 12, Problem 12.2AP

(a)

To determine

Cash flow:

Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.

To determine: The (1) net income, and (2) net annual cash flows for the commuter service.

(b)

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

In simple, the cash payback period is computed as follows:

$\text{Cash payback period =}\frac{\text{Cost of capital investment}}{\text{Net annual cash inflow}}$

The annual rate of return method:

The annual rate of return is the amount of income which is earned over the life of the investment. It is used to measure the annual income as a percent of the annual investment of the business, and it is also known as the accounting rate of return.

The annual rate of return is computed as follows:

$\text{Average rate of return =}\frac{\text{Estimated average annual net income}}{\text{Average investment}}$

To compute: (1) The cash payback period, and (2) the annual rate of return for given proposal.

(c)

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The net present value for the given proposal.

(d)

To determine

To discuss: Whether the project is acceptable or not.