Figure 14-3.Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of five years with no expected salvage value. The expected cash flows associated with the project are as follows:

-Refer to Figure 14-3. What is the average annual income for this project?

Question

Figure 14-3.Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of five years with no expected salvage value. The expected cash flows associated with the project are as follows:
 
-Refer to Figure 14-3. What is the average annual income for this project?

Quizplus · Accepted Answer

To calculate the average annual income, we need to find the total cash inflows over the 5-year lifespan of the equipment and divide by 5. In this case, the total cash inflows are $3,000,000 ($700,000 + $700,000 + $600,000 + $500,000 + $500,000), and dividing that by 5 gives an average annual income of $600,000. Therefore, the best choice is C as it provides the correct answer.