Figure 14-3. Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of five years with no expected salvage value.The expected cash flows associated with the project are as follows:
Refer to Figure 14-3.What is the average annual income for this project?

Question

Figure 14-3. Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of five years with no expected salvage value.The expected cash flows associated with the project are as follows:
 Refer to Figure 14-3.What is the average annual income for this project?

Quizplus · Accepted Answer

To find the average annual income, we need to find the total cash flows over the life of the project and divide by the number of years. The total cash flows are: $600,000 + $700,000 + $800,000 + $900,000 + $1,000,000 = $4,000,000. Dividing by the 5-year life of the project gives us an average annual income of $800,000. However, we need to subtract the annual depreciation expense, which is ($1,600,000/5) = $320,000 per year. So the net average annual income for the project is $800,000 - $320,000 = $480,000. Therefore, the best choice is C.