The management of Nebraska Corporation is considering the purchase of a new mach
ID: 2391356 • Letter: T
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 Net Cash Income from Operations $100,000 40,000 40,000 10,000 10,000 Year Flow $180,000 120,000 100,000 90,000 120,000 4 The average rate of return for this investment is @a. 16% b. 1000 Oc. 58% ca. 18%Explanation / Answer
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 = 0.16 or 16 %
Hence Answer is option a) 16%
[Please note these points while analyzing the above answer : Average rate of return does not take into consideration, the Time Value of Money and It is based on accounting information and not on the basis of actual cash flow]
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