1The following data concerns a proposed equipment purchase: Cost $144,000 Salvag

Question

1The following data concerns a proposed equipment purchase: Cost $144,000 Salvage value $4,000 Estimated useful life 4 years Annual net cash flows $46,100 Depreciation method Straight-line The annual average investment amount used to calculate the accounting rate of return is:

a.$72,000

b.$70,000

c.$37,000

d.$74,000

e.$48,950

2.

A company is considering the purchase of new equipment for $45,000. The projected annual net cash flows are $19,000. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 12% return on investment. The present value of an annuity of 1 for various periods follows:

What is the net present value of this machine assuming all cash flows occur at year-end?

a.($1,768)

b.$3,000

c.$634

d.$19,000

e.$45,634

3.

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows:

The present value factors of $1 each year at 15% are:

The present value of an annuity of $1 for 3 years at 15% is 2.2832

The net present value of Investment B is:

a.$780.

b.($15,780).

c.$9,000.

d.$39,797.

e.($5,918).

Explanation / Answer

Answer:1 d. $74000

(144000+4000)/2=$74000

Annual depreciation expense = ($144,000 - $4,000)/4 = $35,000/yr.

After-tax unit income = $46,100 - $35,000 = $11,100

Accounting rate of return = $11,100/ [($144,000 + $4,000)/2]=15%

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