The management of Nebraska Corporation is considering the purchase of a new mach

Question

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 in this situation:

   13.   The cash payback period for this investment is:

   14.   The average rate of return for this investment is:

Explanation / Answer

Hi,

Please find the answer as follows:

13:

Total Investment Recovered during first 4 Years = 180000 + 120000 + 100000 + 90000 = 490000

Cash Payback Period = 4 Years (the amount of initial investment of 490000 will get recovered in the first 4 years itself)

Answer is 4 Years.

14:

Average Rate of Return = Average Income/Average Investment

Average Income = (100000 + 40000 + 40000 + 10000 + 10000)/5 = 40000

Average Investment = 490000/2 = 245000

Average Rate of Return = 40000/245000*100 = 16.32% or 16%

16% is the answer.

Thanks.

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