The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: The average rate of return for this investment is

Question

The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:  The average rate of return for this investment is

Quizplus · Accepted Answer

To calculate the average rate of return, we need to find the total profit generated by the machine over 5 years and divide it by the initial investment of $380,000.

Using the present value factor of 4.212, we can calculate the total profit as follows:

Total profit = 4.212 x $380,000 = $1,604,760

The average annual profit is then:

Average annual profit = Total profit / Number of years = $1,604,760 / 5 = $320,952

Finally, the average rate of return is:

Average rate of return = (Average annual profit / Initial investment) x 100% = ($320,952 / $380,000) x 100% = 84.45%

Therefore, the investment is acceptable as the average rate of return (84.45%) is greater than the desired rate of return (6%).

However, the answer choices provided do not include the correct percentage. The closest option is B) 10.5%, which is not the correct average rate of return but the average annual profit as a percentage of the initial investment.

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