Question

Q 12.44: JT Engineering wants to buy a machine that costs $360,000, has an 8-year life, and has a $12,000 salvage value. Annual inflows are $120,000 and annual outflows are $86,000 (including depreciation). What is the annual rate of return on this purchase?

• A : 18.28%

• B : 18.88%

• C : 22.86%
• D : 28.33%

Q 12.43: Clarendon Co. is considering purchasing new equipment with a 6-year useful life. The equipment will cost $309,120 and have annual depreciation expense of $47,040 using the straight-line method. Clarendon plans to use the annual rate of return to evaluate this machine. What amount will Clarendon use in the denominator of formula?

• A :$141,120

  B : $168,000

• C : $154,560

  D :$178,080

Q 12.44: HT Tech wants to purchase a $420,000 machine. The machine will last 10 years, be paid off in 6 years, and have no salvage value at the end of its life. Net annual cash flows are $24,000, the discount factor is 12%, and the present value of cash flows is $135,605. Per the NPV method, the purchase is acceptable for HT. What was the determining factor in this decision?

a)The discount rate was under 15%.

b)The cash payback period was shorter than the expected life.

c)The NPV of cash flows was positive.

d)The NPV was less than the purchase price.

Answer 1

Q 12.44

ARR = AVERAGE NET INCOME/AVERAGE INVESTMENT

A. 18.28%

AVERAGE NET INCOME = CASH INFLOWS - CASH OUTFLOWS(INCLUDING DEPRECIATION)

= 120,000 - 86,000

= 34,000

AVERAGE INVESTMENT = (COST + RESIDUAL VALUE)/2

= (360,000 + 12,000)/2

= 186,000

ARR = 34,000/ 186,000

= 18.28%

Q12.43

B.$168,000

DEPRECIATION = COST- SCRAP VALUE/USEFUL LIFE OF ASSET

$47,040 = ($309,120 - SCRAP VALUE)/6 YEARS

RESIDUAL VALUE = $309,120 - ($47,040*6)

= $26,880

ARR = NET INCOME / AVERAGE INVESTMENT

AVERAGE INVESTMENT = $309,120 + 26,880/2

= $168,000

Q12.44

C)THE NPV CASH FLOWS WAS POSITIVE

AS PER NPV METHOD PROPOSAL ONLY CAN BE ACCEPTED WHEN NET PRESENT VALUE OF INVESTMENT WILL BE POSITIVE.