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31 July, 19:52

The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. 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 in this situation:

Year Income from Operations Net Cash Flow

1 $100,000 $180,000

2 40,000 120,000

3 40,000 100,000

4 10,000 90,000

5 10,000 120,000

1) The cash payback period for this investment is:

a) 5 years

b) 4 years

c) 2 years

d) 3 years

2) The average rate of return for this investment is:

a) 18%

b) 16%

c) 58%

d) 10%

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Answers (1)
  1. 31 July, 20:09
    0
    b) 4 years

    b) 16%

    Explanation:

    The computation of cash payback period for this investment is shown below:-

    Year Net Cash Flow Cumulative Net Cash Flow

    1 $180,000 $180,000

    2 $120,000 $300,000

    ($180,000 + $120,000)

    3 $100,000 $400,000

    ($300,000 + $100,000)

    4 $90,000 $490,000

    ($400,000 + $90,000)

    5 $120,000 $610,000

    ($490,000 + $120,000)

    The period of payback is the duration in which the investment is recovered. Investment amounts to $490,000 and the cumulative net cash flow after 4 years is $490,000. So, the payback period is 4 years.

    Year Income from Operations

    1 $100,000

    2 $40,000

    3 $40,000

    4 $10,000

    5 $10,000

    Total $200,000

    Average Income = $200,000 : 5

    = $40,000

    Average Investment = ($0 + $490,000) : 2

    = $245,000

    Average Rate of Return = Average Income : Investment * 100

    = $40000 : $245000 * 100

    = 16.33%

    or

    = 16%
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