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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 $122,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $61,000. The company's minimum desired rate of return for net present value analysis is 12%.
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.fill in the blank 1%
b. The cash payback period.
2 years3 years4 years5 years6 years7 years8 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.
Compute the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45).
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