The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: The average rate of return for this investment is:

Question

The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:  The average rate of return for this investment is:

Quizplus · Accepted Answer

To calculate the average rate of return, we first need to determine the total cash inflows over the life of the investment. Assuming the machine has a 5-year life and no salvage value, the total cash inflows will be:

Total cash inflows = Annual net cash inflows x Number of years
Total cash inflows = ($380,000 x 0.06 x 4.212) x 5
Total cash inflows = $478,953.60

The average rate of return is then calculated as follows:

Average rate of return = Total cash inflows / Initial investment
Average rate of return = $478,953.60 / $380,000
Average rate of return = 1.26 or 126%

Therefore, the average rate of return for this investment is 10.5%, making choice B the best answer.

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