Question

1)

The management of River Corporation is considering the purchase of a new machine costing $380,000 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 foregoing information, use the following data in determining the acceptability of this investment: ncome from Net Cash Year Flow $20,000 20,000 20,000 20,000 20,000 $95,000 95,000 95,000 95,000 95,000 4 The average rate of return for this investment is Ja, 10.5% Ob. 25% oc. 15% od, 5%

2)

3)

4)

5)

Answer 1

1	Option A is the Correct answer
	Average rate of Return	= Average Operating profit / Average Investment
	Average Operating Profit	= 20000
	Average Investment	= 380000/2
		= 190000
	Average Rate of Return	= 20000 / 190000
		= 10.5%
2	Option A is the Correct answer
	In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of nonfinancial factors
3	Option C is the Correct answer
	NPV at 6% for $ 1	= 4.212
	NPV for $ 50000 for next 5 years @ 6% interest	= 50000*4.212
		210600
	NPV of the transaction	= NPV of 50000 for 5 years - Initial Investment
		= 210600-210600
		= 0
	IRR is the rate where the NPV is 0
	Internal Rate of Return	6%
4	Option C is the Correct answer
	Capital Rationing is the process by which management allocates available investment funds among competing investment proposals.
5	Option B is the Correct answer
	Expected Income	20500
	Estimated Life	4
	Average Investment for the period	= 20500/4
	Average Investment for the period	5125