PAYBACK AND ARR
Each of the following scenarios is independent. All cash flows are after tax cash flows.
Required:
1. Don Blackburn has purchased a tractor for $62,500. He expects to receive a net cash flow of $15,625 per year from the investment. What is the payback period for Don?
2. Bill Johnson invested $600,000 in a laundromat. The facility has a 10 year life expectancy with no expected salvage value. The laundromat will produce a net cash flow of $180,000 per year. What is the accounting rate of return? Use original investment for the computation.
3. Kathleen Shorts has purchased a business building for $700,000. She expects to receive the following cash flows over a 10 year period:
Year 1: $87,500
Year 2: $122,500
Years 3–10: $175,000
What is the payback period for Kathleen? What is the accounting rate of return (using average investment and assuming straight line depreciation over the 10 years)?