The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. 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 Wyoming Corporation is considering the purchase of a new machine costing $375,000. 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 determine the average rate of return for the investment, the annual net cash inflows must be calculated. Assuming the new machine will generate annual net cash inflows of $100,000 for five years, the total net cash inflow would be $500,000 ($100,000 x 5 years).

To calculate the average rate of return, the annual net cash inflows are divided by the initial investment of $375,000.

$500,000 ÷ $375,000 = 1.33

To convert this to a percentage, subtract 1 and multiply by 100.

(1.33 - 1) x 100 = 33%

Since the average rate of return (33%) is higher than the desired rate of return (6%), the investment is acceptable.

Therefore, the best choice is B.

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