Question

Average Rate of Return

The following data are accumulated by McDermott Motors Inc. evaluating two competing capital investment proposals:

Testing Equipment |
Diagnostic Software |
|||

Amount of investment | $60,000 | $64,000 | ||

Useful life | 4 years | 9 years | ||

Estimated residual value | $0 | $0 | ||

Estimated total income over the useful life | $9,600 | $33,120 |

Determine the expected average rate of return for each proposal. If required, round to one decimal place.

Testing Equipment | % |

Diagnostic Software | % |

Answer #1

Average Rate of Return
The following data are accumulated by Watershed Inc. in
evaluating two competing capital investment proposals:
Project A
Project Z
Amount of investment
$52,000
$52,000
Useful life
4 years
5 years
Estimated residual value
0
0
Estimated total income over the useful life
$7,800
$13,000
Determine the expected average rate of return for each project.
Round your answers to one decimal place.
Project A
%
Project Z
%

Average Rate of Return
The following data are accumulated by Lone Peak Inc. in
evaluating two competing capital investment proposals:
3D Printer
Truck
Amount of investment
$56,000
$76,000
Useful life
4 years
9 years
Estimated residual value
0
0
Estimated total income over the useful life
$8,960
$37,620
Determine the expected average rate of return for each proposal.
If required, round your answers to one decimal place.
3D Printer
%
Truck
%

#29
Redwood Corporation is considering two alternative investment
proposals with the following data:
Proposal X
Proposal Y
Investment
$ $830,000
$ $534,000
Useful life
7 years
7 years
Estimated annual net
cash inflows for
77
years
$ $120,000
$ $84,000
Residual value
$ $31,000
$
Depreciation method
Straight−line
Straight−line
Required rate of return
10%
7%
How long is the payback period for Proposal Y?
#31
Selected financial data for The Portland Porcelain Works Coffee
Mug Division is as follows:
Sales...

net present value method The following data are accumulated by
Geddes Company in evaluating the purchase of $150,000 of equipment,
having a four-year useful life: Net Income Net Cash Flow Year 1
$45,500 $83,000 Year 2 20,500 58,000 Year 3 17,000 54,500 Year 4
3,500 41,000 Assuming that the desired rate of return is 20%,
determine the net present value for the proposal. If required,
round to the nearest dollar.

Net present value method
The following data are accumulated by Geddes Company in
evaluating the purchase of $160,000 of equipment, having a
four-year useful life:
Net Income Net Cash Flow
Year 1: $42,000 $82,000
Year 2: 22,500 62,500
Year 3: 10,000 50,000
Year 4: 6,000 46,000
This information has been collected in the Microsoft Excel
Online file. Open the spreadsheet, perform the required analysis,
and input your answers in the questions below.
Open spreadsheet
a) Assuming that the desired rate...

The following data are accumulated by Paxton Company in
evaluating the purchase of $199,000 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$43,000
$73,000
Year 2
26,000
56,000
Year 3
13,000
42,000
Year 4
(1,000)
28,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5...

The following data are accumulated by Geddes Company in
evaluating the purchase of $109,100 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$30,000
$51,000
Year 2
18,000
39,000
Year 3
9,000
30,000
Year 4
(1,000)
20,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5...

The following data are accumulated by Paxton Company in
evaluating the purchase of $142,800 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$41,000
$70,000
Year 2
25,000
54,000
Year 3
12,000
41,000
Year 4
(1,000)
27,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5...

Average Rate of Return—Cost Savings
Maui Fabricators Inc. is considering an investment in equipment
that will replace direct labor. The equipment has a cost of
$124,000 with a $11,000 residual value and a ten-year life. The
equipment will replace one employee who has an average wage of
$24,040 per year. In addition, the equipment will have operating
and energy costs of $5,990 per year.
Determine the average rate of return on the equipment, giving
effect to straight-line depreciation on the...

Average Rate of Return—Cost Savings
Midwest Fabricators Inc. is considering an investment in
equipment that will replace direct labor. The equipment has a cost
of $90,000 with a $8,000 residual value and a five-year life. The
equipment will replace one employee who has an average wage of
$31,460 per year. In addition, the equipment will have operating
and energy costs of $8,690 per year.
Determine the average rate of return on the equipment, giving
effect to straight-line depreciation on the...

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