Gamma Inc.is considering the purchase of a machine costing $450,000, having a useful life of five years.Depreciation would be recognized using the straight-line method, and the machine would have no residual value at the end of its useful life.The estimated total net income from the machine is $600,000.The average investment for the machine is:

Question

Quizplus · Accepted Answer

The average investment for the machine can be calculated using the following formula: 
Average Investment = (Cost of Asset + Salvage Value) / 2
Since the machine has no residual value, Salvage Value = 0.
Therefore, Average Investment = ($450,000 + $0) / 2 = $225,000.
This is the amount that Gamma Inc. would need to invest annually in the machine to earn the estimated net income of $600,000. Choice C is the correct answer.

Gamma IncIs Considering the Purchase of a Machine Costing $450,000, Having