Question

Average Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company

Answer 1

Answer:

12.5%

4 years

NPV = $302,387

PV of cash flows = $1,552,387

Amount invested = $1,250,000

Explanation:

Average rate of return = net income / amount invested

Net income = cash flow - depreciation

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

1,250,000 / 8 = 156,250

Net income = $312,500 - 156,250 = $156250

(156250 / $1,250,000) x 100 = 12.50%

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Payback period = Amount invested / cash flow

$1,250,000 / $312,500 = 4 years

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Cash flow in year 0 = $-1,250,000

Cash flow each year from year 1 to 8 = $312,500

I = 12%

NPV =  $302,387

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.