Question

The management of London Corporation is considering the purchase of a new machine costing $750,000. The company's desired rate of return is 6%. The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively. In addition to this information, use the following data in determining the acceptability in this situation:Year Income fromOperations Net Cash Flow1 $37,500 $187,500 2 37,500 187,500 3 37,500 187,500 4 37,500 187,500 5 37,500 187,500 The average rate of return for this investment is:____________a.10%.b. 25%.c.15%.d. 5%.

Answer 1

Answer:

London Corporation

The average rate of return for this investment is:____________

b. 25%.

Explanation:

a) Data and Calculations:

Cost of new machine = $750,000

Desired rate of return = 6%

Present value factors:

1   0.943,

2  0.890,

3  0.840,

4  0.792,

5  0.747

Year Income from Operations   Net Cash Flow

1                    $37,500                    $187,500

2                     37,500                       187,500

3                     37,500                       187,500

4                     37,500                       187,500

5                     37,500                       187,500

Total           $187,500                    $937,500

The average rate of return for this investment is the total profit divided by total investment, multiplied by 100.

= $187,500/$750,000 * 100

= 25%