Memphis Co.is considering purchasing a machine for $83,200 that will increase cash flows by $40,000 in the first year,$30,000 the second year,and $25,000 the third year.The machine will have no residual value.The minimum rate of return is 10 percent.The present value factors,at 10 percent,for the three years are 0.909,0.826,and 0.751,respectively.
-Using the above information for Memphis,the machine's actual rate of return is
A)negative.
B)greater than 10 percent.
C)less than 10 percent.
D)10 percent.

Question

Memphis Co.is considering purchasing a machine for $83,200 that will increase cash flows by $40,000 in the first year,$30,000 the second year,and $25,000 the third year.The machine will have no residual value.The minimum rate of return is 10 percent.The present value factors,at 10 percent,for the three years are 0.909,0.826,and 0.751,respectively. 
-Using the above information for Memphis,the machine's actual rate of return is
A)negative.
B)greater than 10 percent.
C)less than 10 percent.
D)10 percent.

Quizplus · Accepted Answer

The present value of cash flows is calculated as: $40,000 * 0.909 + $30,000 * 0.826 + $25,000 * 0.751 = $36,360 + $24,780 + $18,775 = $79,915. The present value of cash flows ($79,915) is less than the cost of the machine ($83,200), indicating the actual rate of return is less than 10 percent.