The management of Indiana Corporation is considering the purchase of a new machine costing $400,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.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 Indiana Corporation is considering the purchase of a new machine costing $400,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.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 determine the average rate of return for the investment, we need to calculate the expected annual cash inflows and divide them by the initial cost of the machine.

Assuming Indiana Corporation expects to receive the same annual cash inflow over the 5-year period, we can use the following calculation:

Annual cash inflow = Future Value / Present Value factor
Annual cash inflow = $100,000 / 0.751
Annual cash inflow = $133,156.46

Now we can calculate the average rate of return using the following formula:

Average rate of return = (Total annual cash inflows - Initial cost) / Initial cost
Average rate of return = ($133,156.46 x 5 - $400,000) / $400,000
Average rate of return = $665,782.3 / $400,000
Average rate of return = 1.664456
Average rate of return = 16.64%

Therefore, the best choice is B with an average rate of return of 16.64%, which is higher than the company's desired rate of return of 10%. This investment is acceptable.

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