Downhill Gear is planning to expand its product line, which requires investment of $360,000 in special-purpose machinery. The machinery has a useful life of six years and no salvage value. The estimated annual results of offering the new products are as follows:

Revenue................................................................................	$400,000
Expenses (including straight-line depreciation)..........................	(380,000	)
Increase in net income...........................................................	$ 20,000

All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.

The payback period for this proposed investment is:

Answer

A) 4.5 years.

B) Twelve years.

C) Six years.

D) Two years.

The return on average investment for this proposed investment is:

Answer

A) 8 1/3%.

B) 50%.

C) 25%.

D) 11.1%

Compute the net present value of this proposed investment, using a discount rate of 12%. (An annuity table shows that the present value of $1 received annually for six years, discounted at 12%, is 4.111.)

Answer

		A) $126,660.
		B) ($31,120).
		C) $82,220.
		D) $328,880.