The management of Douglass Corporation is considering the purchase of a new mach
ID: 2489649 • Letter: T
Question
The management of Douglass Corporation is considering the purchase of a new machine costing $750,000. The company’s desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the this information, use the following data in determining the acceptability in this situation:
Income from Net Cash
Year Operations Flow
1 $37,700 $187,500
2 37,700 187,500
3 37,700 187,500
4 37,700 187,500
5 37,700 187,500
The cash payback period for this investment is
a. 4 years.
b. 5 years.
c. 20 years.
d. 3 years.
(Use above info) The average rate of return for this investment is
a. 5%.
b. 10%.
c. 25%.
d. 15%.
(Use Above Info) The net present value for this investment is
a. negative $118,145.
b. positive $118,145.
c. positive $39,750.
d. negative $39,750.
The management of Douglass Corporation is considering the purchase of a new machine costing $750,000. The company’s desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the this information, use the following data in determining the acceptability in this situation:
Income from Net Cash
Year Operations Flow
1 $37,700 $187,500
2 37,700 187,500
3 37,700 187,500
4 37,700 187,500
5 37,700 187,500
The cash payback period for this investment is
a. 4 years.
b. 5 years.
c. 20 years.
d. 3 years.
Explanation / Answer
Answer 1. Payback Period = Investment required for projcet / Net annual Cash Inflow Payback Period = $750000 / $187500 = 4 Years The cash payback period for this investment is = 4 Years Answer 2. Average Rate of Return = Avg. Profit / Intial Investment X 100 Average Rate of Return = $37700 / $750000 X 100 = 5% The average rate of return for this investment is 5% Answer 3. Amt. (A) PV Vale of annuity @6% (B) FV (A X B) C. Cash Inflow Year 1 -5 $187,500 4.212 $789,750 D. Cash Outflow Year ) $750,000 1 $750,000 NPV (C-D) $39,750 c. The net present value for this investment is positive $39,750.
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