Question

Thornton Painting Company is considering whether to purchase a new spray paint machine that costs $3,200. The machine is expected to save labor, increasing net income by $480 per year. The effective life of the machine is 15 years according to the manufacturer's estimate. Required a. Determine the unadjusted rate of return based on the average cost of the investment. (Enter your answer as a whole percentage (e.g. 0.55 should be entered as 55).) Unadjusted rate of return

Answer 1

Computation of unadjusted rate of return:

Unadjusted rate of return = Increase in average annual income / Average amount of investment

= $480 / $1,600

= 0.30 or 30%

Hence, the unadjusted return is 30%.

Working Note:

Computation of average amount of investment is:

Average amount of investment = (Amount of investment in the beginning + Amount of investment at the ending) / 2

= ($3,200 + $0) / 2

= $3,200 / 2

= $1,600

Hence, the average amount of investment is $1,600.