Calculator The management of Nebraska Corporation is considering the purchase of

Question

Calculator The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909,0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability: Income from Net Cash Year Flow $100,000 40,000 40,000 10,000 10,000 $180,000 120,000 100,000 90,000 120,000 The average rate of return for this investment is Oa, 1896 Ob. 58% ??. 1096 Od. 16%

Explanation / Answer

average rate of return on investment = average annual net income/ average investment*100

average annual net income = (100000 +40000 + 40000 + 10000 + 10000)/5 = 200000/5 =40000

average investment = initial investment/ 2 = 490000/2 = 245000 (as no salvage value is given)

average rate of return on investment = 40000/2450000*100 = 16.32%

so answer = 16%

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