The St. Louis to Seattle Railroad is considering acquiring equipment at a cost of $3,600,000. The equipment has an estimated life of 8 years and no residual value. It is expected to provide yearly net cash flows of $750,000. 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.
b. The cash payback period.
c. The net present value. Use the present value of an annuity table appearing in Exhibit 5 of this chapter.

Exhibit 5

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Year 1234567890 Present Value of an Annuity of $1 at Compound Interest 10% 6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 15% 0.870 1.626 2.283 2.855 3.353 3.785 4.160 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 Exhibit 5 Partial Present Value of an Annuity Table