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 50%.

Question

Quizplus · Accepted Answer

The average rate of return is calculated as the average annual operating income divided by the initial investment cost. Here, the average annual operating income is $12,000 / 6 years = $2,000. The initial cost of the machine is $24,000. Therefore, the average rate of return is $2,000 / $24,000 = 8.33%, not 50%.

A Company Is Planning to Purchase a Machine That Will