A small paper producer is considering the purchase of a new machine to add to their assembly line. This machine would afford them the opportunity to increase their production by 15%. They are currently gathering pricing information from vendors and are trying to figure out what they would want to invest. They have gathered the following information: If the company has a Required Rate of Return of 8%, then what amount would they want to spend on the new machine?
A) $102.72
B) $1,342.00
C) $8,560.00
D) $16,050.00

Question

A small paper producer is considering the purchase of a new machine to add to their assembly line. This machine would afford them the opportunity to increase their production by 15%. They are currently gathering pricing information from vendors and are trying to figure out what they would want to invest. They have gathered the following information:  If the company has a Required Rate of Return of 8%, then what amount would they want to spend on the new machine?
A) $102.72 
B) $1,342.00 
C) $8,560.00 
D) $16,050.00

Quizplus · Accepted Answer

This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of the numbers. Solve for investment as follows: $58 = $1,342 - (0.08 × Investment). $58 + (0.08 × Investment) = $1,342. (0.08 × Investment) = $1,284. Lastly, divide each side by 0.08. Investment = $16,050.00 (Choice D).

A Small Paper Producer Is Considering the Purchase of a New