Question 8 3 pts A company is considering purchasing factory equipment that cost

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Question 8 3 pts A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used If the equipment is purchased, the average rate of return expected on this equipment is 40.0% 7.5% ? 60% ? 15% ? 20% Question 9 3 pts Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project's life are Year Net Annual Cash Flow $3,000 8,000 15,000 9,000 3 4 The cash payback period is 2.29 years O 2.60 years O 2.40 years O 2.31 years

Explanation / Answer

8. Answer: 15%

Average rate of return = Average net income/Average investment = $36000/$240000 = 15%

Average net income = Revenues $135000 - Operating expenses $39000 - Depreciation $60000 = $36000

Depreciation =$480000/8 years = $60000

Average investment = (Book value at beginning + Book value at end of useful life)/2 = ($480000 = $0)/2 = $240000

9. Answer: 2.60 years

Cash payback period = 2 + (9000/15000) = 2 + 0.60 = 2.60 years

Year Annual Cash Flow Cumulative cash flow 0 -20000 -20000 1 3000 -17000 2 8000 -9000 3 15000 6000 4 9000

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