Question
Question 1 : The controller at Bolden has determined that the company could save $4,000 per year in engineering costs by purchasing a new machine.
Question 1 :
The controller at Bolden has determined that the company could save $4,000 per year in engineering costs by purchasing a new machine. The new machine would last 10 years and provide the aforementioned annual monetary benefit throughout its entire life. Assuming the interest rate at which Bolden purchases this type of machinery is 10%, what is the maximum amount the company should pay for the machine?______ $ (Hint: This is basically a present value of an ordinary annuity problem as highlighted above.)
Problem Information 1:
Using the previous table, enter the correct factor for three periods at 5%:
Periodic payment x Factor = Present value
$6,000x 2.723= $16,338
Previous Table:
Table 2 - Present Value of an Ordinary Annuity of $1 at Compound Interest
Period5%6%7%8%9%10%11%12%
10.9520.9430.9350.9260.9170.9090.9010.893
21.8591.8331.8081.7831.7591.7361.7131.690
32.7232.6732.6242.5772.5312.4872.4442.402
43.5463.4653.3873.3123.2403.1703.1023.037
54.3294.2124.1003.9933.8903.7913.6963.605
65.0764.9174.7674.6234.4864.3554.2314.111
75.7865.5825.3895.2065.0334.8684.7124.564
86.4636.2105.9715.7475.5355.3355.1464.968
97.1086.8026.5156.2475.9955.7595.5375.328
107.7227.3607.0246.7106.4186.1455.8895.650
118.3067.8877.4997.1396.8056.4956.2075.938
128.8638.3847.9437.5367.1616.8146.4926.194
139.3948.8538.3587.9047.4877.1036.7506.424
149.8999.2958.7458.2447.7867.3676.9826.628
1510.3809.7129.1088.5598.0617.6067.1916.811
1610.83810.1069.4478.8518.3137.8247.3796.974
1711.27410.4779.7639.1228.5448.0227.5497.120
1811.69010.82810.0599.3728.7568.2017.7027.250
1912.08511.15810.3369.6048.9508.3657.8397.366
2012.46211.47010.5949.8189.1298.5147.9637.469
Question 2
Average Rate of Return
The average rate of return is another method that does not use present value and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow.
Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: Year 1 - $10,000, Year 2 - $20,000, Year 3 - $30,000, Year 4 - $40,000 and Year 5 - $50,000.
Use the minus sign to indicate a net loss. If an amount is zero, enter "0".
Year Revenues Expenses Net Income
Year 1Net Income (loss) = $______- $ _____= $_____
Year 2 Net Income (loss) = $______- $ _____= $_____
Year 3 Net Income (loss) = $______- $ _____= $_____
Year 4 Net Income (loss) = $______- $ _____= $_____
Year Net Income (loss) = $______- $ _____= $_____
Total Net Income (five years) = $_____
Average Net Income = $????? = $?????
$????
Average Rate of Return = $????? = ____%
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