WP Demo Ch10

WP Demo Ch10 - Demo 10-1 Payback/Unadjusted Rate of Return...

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Demo 10-1 Payback/Unadjusted Rate of Return EZ Rentals can purchase a van that costs $24,000. The van has an expected useful life of 5 years and no salvage value. EZ expects cash revenue from leasing the van to be $12,000 per year. Alternatively, EZ can purchase a car that costs $16,000. EZ expects cash revenue from leasing the car to be $10,000 per year over a 3-year useful life. Ignore income taxes. a. Determine the payback period for the van and the car: Cash Cost of Investment ÷ Annual Cash Inflow = Payback Van ÷ = years Car ÷ = years b. Indicate which vehicle is the better alternative if payback is used as the sole investment criteria. c. Describe the possible shortcomings of using payback as the investment criteria. d. Determine the unadjusted rate of return for both alternatives. First, determine the average annual increase in net income: Van Car Revenue Depreciation Expense* Increase in Net Income $ 7,200 $ 4,667 *Van: Car: Next, determine the unadjusted rate of return: Increase in Annual Net
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WP Demo Ch10 - Demo 10-1 Payback/Unadjusted Rate of Return...

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