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 6.3%, then what is the amount they would want to spend on the new machine?
A) $84.55
B) $1,400.00
C) $8,560.00
D) $20,380.95

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 6.3%, then what is the amount they would want to spend on the new machine?
A) $84.55 
B) $1,400.00 
C) $8,560.00 
D) $20,380.95

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 these numbers. Solve for investment as follows: $58 = $1,342 - (0.063 × Investment). $58 + (0.063 × Investment) = $1,342. (0.063 × Investment) = $1,284. Lastly, divide each side by 0.063. Investment = $20,380.95 (Choice D).

A Small Paper Producer Is Considering the Purchase of a New