(2) The management of River Corporation is considering the purchase of a new mac

Question

(2) The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

Year Income from Operations Net Cash Flow

1 $20,000 $95,000

2 20,000 95,000

3 20,000 95,000

4 20,000 95,000

5 20,000 95,000

What is the average rate of return for this investment?

Explanation / Answer

Average rate of Return = Average Operating profit / Average Investment Average Operating Profit = $20000 Average Investment = $380000/2 = $190000 Average Rate of Return = 20000 / 190000 = 10.53% (Approx)

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