A company is planning to purchase a machine that will cost $24,000, have a 6-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 operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. 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 average annual net cash inflows by the initial investment and multiplying by 100. In this case, the average annual net cash inflows are $6,000 and the initial investment is $24,000, so the average rate of return is (6,000 / 24,000) * 100 = 25%.

A Company Is Planning to Purchase a Machine That Will