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6 February, 09:34

Madrigal Corporation purchased a new machine for $120,000. The machine has an estimated useful life of 10-years with no salvage value and a return on investment (ROI) of 15%. ROI is computed using annual cash flows and straight-line depreciation. What is the annual cash flow using the gross book value method?

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  1. 6 February, 09:48
    0
    The annual cash flow using the gross book value method is $18,000

    Explanation:

    In order to calculate the annual cash flow using the gross book value method we would have to calculate the following formula:

    annual cash flow = (value of new machine*ROI) / 100

    Value of the new machine=$120,000

    ROI=15%

    annual cash flow = ($120,000 * 15%) / 100 =

    annual cash flow=$18,000

    The annual cash flow using the gross book value method is $18,000
  2. 6 February, 09:49
    0
    The multiple choices are:

    $28,000.

    $21,000.

    $14,000.

    $30,000.

    The correct option is $30,000, the last one.

    Explanation:

    Return on investment=net income/initial capital outlay

    return on investment is 15% or 0.15

    net income is unknown

    initial investment is $120,000

    0.15=net income/$120,000

    net income=0.15*$120,000=$18,000

    Annual cash flow=net income+depreciation

    depreciation=cost of asset/useful life

    cost of asset is $120,000 and useful life is 10

    depreciation=$120,000/10=$12000

    annual cash flow=$18,000+$12,000=$30,000
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