A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The average rate of return for the machine is 16.7%.

Question

Quizplus · Accepted Answer

The average rate of return is calculated by dividing the net cash flows by the initial investment, and then multiplying by 100 to get a percentage. In this case, the net cash flows per year are $6,000, and the initial investment is $24,000. So, (6,000/24,000) * 100 = 25%. This is higher than the expected rate of return of 16.7%, so the investment is considered profitable.

A Company Is Planning to Purchase a Machine That Will