Chicago Co. is interested in purchasing a machine that would improve its operational efficiency. The cost is $200,000 with an estimated residual value of $20,000 and a useful life of eight years. Cash inflows are expected to increase by $40,000 a year. The company's minimum rate of return is 10 percent. The present value of $1 for eight years at 10 percent is 0.467, and the present value of an annuity of $1 at 10 percent and eight years is 5.335. The project earns a rate of return of

Question

Quizplus · Accepted Answer

To calculate the rate of return, we need to use the Net Present Value (NPV) formula: 
NPV = (Cash inflows - Cost of the machine) + PV of the residual value
NPV = ($40,000 x 8 years - $200,000) + ($20,000 x 0.467)
NPV = $140,600
Since the NPV is positive, the project is profitable and earning a rate of return greater than the minimum rate of return of 10%. Therefore, the answer is B, greater than 10%.