The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

-The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the four years, is

Question

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:
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-The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the four years, is

Quizplus · Accepted Answer

The average rate of return is calculated as the average annual net income divided by the initial investment. The total net income is $240,000 over four years, so the average annual net income is $240,000 / 4 = $60,000. The average rate of return is then $60,000 / $650,000 = 0.0923 or 9.23%. However, the correct calculation should consider the average investment, which is ($650,000 + $0) / 2 = $325,000. Thus, the average rate of return is $60,000 / $325,000 = 0.1846 or 18.5%.

The Management of Wyoming Corporation Is Considering the Purchase of a New