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 50%.

Question

Quizplus · Accepted Answer

The average rate of return for the machine cannot be 50% since it would imply that the net cash flows per year are $12,000, which is twice as much as the actual amount of $6,000. Therefore, the statement is false.

A Company Is Planning to Purchase a Machine That Will