Question

A. The amount of the estimated average income for a proposed investment of $63,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $23,400, is? Choose the correct answer below. $15,750 $23,400 $8,100 $5,850 B. Hayden Company is considering the acquisition of a machine that costs $490,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $92,000, and annual operating income of $78,200. What is the estimated cash payback period for the machine (round to one decimal points)? Choose the correct answer below. 1.2 years 5.3 years 7.4 years 6.3 years

Answer 1

Solution

A. Estimated average income = expected total income/useful life

Expected total income = $23,400

Period – 4 years

Estimated average income = 23,400/4 = $5,850

B. Heyden Company

Estimated cash payback period for the machine = initial investment/annual net cash flow

Initial investment = $490,000

Annual net cash flow = $92,000

Estimated cash payback period for the machine = 490,000/92,000 = 5.3 years

C. Expected average rate of return for a proposed investment = annual income/initial investment

Average annual income = total net income/period

= $8,260,000/20 years = $413,000

Initial investment = $4,130,000

Expected average rate of return = 413,000/4,130,000 = 10%

Expected average rate of return = 10%

D. Expected average rate of return for a proposed investment = annual income/initial investment

Average annual income = total net income/period

= $373,000/4 years = $93,250

Initial investment = $719,000

Expected average rate of return = 93,250/719,000 = 12.97%

Expected average rate of return = 12.97%

E. Heidi Company

Estimated cash payback period for the machine:

Cash payback period = initial investment/annual net cash flow

Initial investment = $1,066,500

Annual net cash flow = $135,000

Cash payback period = 1,066,500/135,000 = 7.9 years

Cash payback period = 7.9 years

F. Machine with best average rate of return:

Average rate of return = average annual income/average investment

Machine A –

Average rate of return = 45,681.86/326,299 = 14%

Machine B –

Average rate of return = 63,915.30/213,051 = 30%

Machine C –

Average rate of return = 74,850.15/499,001 = 15%

Machine B has the best average rate of return, 30%.

Choose Machine B.

G.