20 of 28 company is considering investing in a new machine for $1,000,000 Thus m

Question

20 of 28 company is considering investing in a new machine for $1,000,000 Thus machine is expected to last sox years and wil be sold for $250,000 at the end of thaat time he new machine is expected to generale a proit of $180,000 per annum (after dopreciation) ssurning cash nows occur at the end of the year and using the avera?? n estmont method wh l ts the acce uren 'ale of ret rn (ARR) and at the end ct wtich you doeste payback pore do in Payback period occurs at the end of Year 4 Year 4 Year 6 ARR 25 4% 28 8% 180% 254% ?? Year 6 O A ?? O D Next Qu

Explanation / Answer

Solution:

Average Net profit = $180,000

Average Investment = (Initial cost of machine + resale value at end) / 2 = ($1000000 +$250000) / 2 = $625,000

Accounting rate of return = Average net profit / Average Investment = $180000 / $625000 = 28.80%

Annual cash inflows = Annual Net profit +Annual depreciation

Annual Depreciation = ($1,000,000 -$250,000) / 6 = $125,000

Annual Cash inflows = $180000 + $125000 = $305,000

Payback Period = Initial Investment / Annual cash inflows = 1000000 / 305000 = 3.28 or say Year 4

Hence, B option is correct.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.