Question

Franklin Rentals can purchase a van that costs $108,000; it has an expected useful life of four years and no salvage value. Franklin uses straight-line depreciation. Expected revenue is $45,360 per year. Assume that depreciation is the only expense associated with this investment. Required Determine the payback period. (Round your answer to 1 decimal place.) Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)

Answer 1

Answer and Explanation:

The computation is shown below

Payback period is

= Purchase value ÷ expected revenue per year

= $108,000 ÷ $45,360

= 2.38 years

= 2.4 years

Now the unadjusted rate of return based on the average cost of the investment is

= ($45,360 - $108,000 ÷ 4) ÷ ($108,000 ÷ 2)

= $18,360 ÷ $54,000

= 34.0%

The same would be considered