Question

13. A company is considering purchasing a machine that costs $344000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100000 and annual operating expenses exclusive of depreciation expense are expected to be $38000. The straight-line method of depreciation would be used.

If the machine is purchased, the annual rate of return expected on this machine is

36.04%.

11.05%.

5.52%.

18.02%.

14. A company projects an increase in net income of $184500 each year for the next five years if it invests $900000 in new equipment. The equipment has a 5-year life and an estimated salvage value of $300000. What is the annual rate of return on this investment?

20.5%

31.0%

30.0%

30.8%

15. A company is considering purchasing factory equipment that costs $480000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $106200 and annual operating expenses exclusive of depreciation expense are expected to be $39000. The straight-line method of depreciation would be used.

If the equipment is purchased, the annual rate of return expected on this equipment is

3.0%.

14.0%.

28.0%.

1.5%.

17. Splish Brothers Inc. is contemplating a capital investment of $108000. The cash flows over the project’s four years are:

Expected Annual	Expected Annual
Year	Cash Inflows	Cash Outflows
1	$38000	$14000
2	63000	23000
3	73000	30000
4	65000	40000

The cash payback period is

3.10 years.

2.16 years.

3.04 years.

3.63 years.

Answer 1

(1)

Annual net income = annual cash flow - annual depreciation

= ($100000 - $38000) - {($344000 - 0$)/8}

= $62000 - $43000

= $19000

Average investment = (initial investment + salvage value at the end of useful life)/2

= ($344000 + $0)/2= $172000

therefore,

Annual rate of return = average annual net income/average investment

Therefore,

= $19000/$172000

= 11.05%

(2)

Increase in annual net income = $184500

Average investment = (initial investment + salvage value at the end of useful life)/2

= ($900000 + $300000)/2= $600000

therefore,

Annual rate of return = average annual net income/average investment

Therefore,

= $184500/$600000

= 30.8%