A company is planning to purchase a machine that will cost $24,000,have a 6-year life,and have no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.Total income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The average rate of return for the machine is 16.7%.

Question

Quizplus · Accepted Answer

To calculate the average rate of return, we use the formula:
Average Rate of Return = (Total annual net cash flows / Initial investment) x 100

Plugging in the values, we get:
Average Rate of Return = (6,000 x 6 / 24,000) x 100
Average Rate of Return = 25%

Since the given average rate of return is 16.7%, which is lower than our calculated rate of return, the machine is a good investment. Therefore, the answer is true (option A).

A Company Is Planning to Purchase a Machine That Will