Question

The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:Year Income fromOperations Net CashFlow1 $100,000 $180,0002 60,000 120,0003 30,000 100,0004 10,000 90,0005 10,000 90,000The average rate of return for this investment is

Answer 1

Answer:

The average rate of return for this investment is 21%

Explanation:

Average rate of return : The average rate of return shows the ratio between average net income and average initial investment.

Mathematically,

Average rate of return = Average Net income ÷ Average Initial Investment

where Average Net income = Total years of net income ÷ Number of years

= ($100,000 + $60,000 + $30,000 + $10,000 + $10,000) ÷ 5

= $42,000

And, Average Initial Investment = Initial Investment ÷ 2

                                                     = $400,000 ÷ 2

                                                     = $200,000

Now, average rate of return = $42,000 ÷ $200,000

                                              = 21%

Thus, the average rate of return for this investment is 21%