06. Harris Corp. is considering investing $50,000 in equipment to produce a new
ID: 2598459 • Letter: 0
Question
06. Harris Corp. is considering investing $50,000 in equipment to produce a new product. The useful service life of the equipment is estimated to be 10 years, with no salvage value. Straight-line depreciation is used. Harris estimates that production and sale of the new product will increase net income by $5,000 per year. What is the of return on average investment in this equipment? expected rate a. 7.5% b. 15% 2 0% 25% c. d. 97. Fox Corp. is considering purchasing equipment costing $109,000 with an estimated life of 3 years and no salvage value. The net after tax cash flow from the project for each of the 3 years is expected to be $45,000. Fox's cost of capital is 10%. Compute the net present value of the equipment. Present value of $1 due in 3 years, discounted at 10%, is 0.751 . Present value of $1 received annually for 3 years, discounted at 10%, is 2.487. a. $2,548 b. $2,915 c. $3,213 d. $3,616Explanation / Answer
Answer 96.
Initial Investment = $50,000
Incremental Net Income = $5,000
Average Investment = Initial Investment / 2
Average Investment = $50,000 / 2
Average Investment = $25,000
Average Rate of Return = Incremental Net Income / Average Investment
Average Rate of Return = $5,000 / $25,000
Average Rate of Return = 0.20 = 20%
Answer 97.
Cost of Equipment = $109,000
Life of Equipment = 3 years
Annual Net Cash flow = $45,000
Cost of Capital = 10%
Net Present Value = -$109,000 + $45,000 * PV of an Annuity of $1 (10%, 3)
Net Present Value = -$109,000 + $45,000 * 2.487
Net Present Value = $2,915
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.