Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts. The machine
Question:
The machine generates, on average, $5,800 per year in additional net income.
a. What is the average accounting return for this machine?
b. What three flaws are inherent in this decision rule?
PURCHASE YEAR 1 YEAR 2 DATE YEAR 3 YEAR 4 Gross investment Less: Accumulated depreciation Net investment $57,000 28,500 $57,000 14,250 $42,750 $57,000 $57,000 $57,000 57,000 42,750 $14,250 $57,000 $28,500
Step by Step Answer:
a The average accounting return is the average project earnings after taxes divided by the average b...View the full answer
Corporate Finance Core Principles and Applications
ISBN: 978-1259289903
5th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Related Video
Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.
Students also viewed these Business questions
-
A firm is considering purchasing a machine that costs $65,000. It will be used for six years, and the salvage value at that time is expected to be zero. The machine will save $35,000 per year in...
-
Your firm is considering purchasing some computers. Each computer costs $2,600, and each will add to your net revenue by known amounts. Because you plan to use the computers for different purposes,...
-
A corporation is considering purchasing a machine that will save $150,000 per year before taxes. The cost of operating the machine (including maintenance) is $30,000 per year. The machine will be...
-
MVP Company issued a callable bond. The bond is a 7% semiannual coupon bond currently priced at 102 that has a remaining time to maturity of seven years. The bond is callable beginning the end of...
-
Cool Rays Ltd. is considering dropping its Tinted Glass product line. The Tinted Lens product line income statement for the last year was as follows: The company has a total of 3 product lines. Only...
-
Reconsider Problem 3.29. If \(V_{a n}, V_{b n}\), and \(V_{c n}\) are a negative-sequence set, how would the voltage and current relationships change? (a) If \(C_{1}\) is the complex...
-
Why is it important to use a structured project management approach ?
-
Swan's Supplies is a wholesaler of sporting goods equipment for retailers in a local metropolitan area. The company buys sporting goods equipment direct from manufacturers and then resells them to...
-
Joe is a short-order chef and has always dreamed of owning his own burger joint. After years of waiting, the opportunity arrived when he heard that Burgers-R-Us, a national fast food chain, was...
-
A box mass 55.0 kg is moving along the x-axis attached to a uniform spring of mass 6.50 kg and force constant 2500 N/m. Calculate the angular frequency of the box by considering effect of mass of the...
-
An investment project has annual cash inflows of $4,300, $4,900, $5,400, and $5,600, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial cost...
-
The Patches Group has invested $27,000 in a high-tech project lasting three years. Depreciation is $8,100, $12,400, and $6,500 in Years 1, 2, and 3, respectively. The project generates earnings...
-
Describe vertical price fixing, and make clear how it differs from horizontal price fixing. What does the Colgate doctrine have to do with the legality of vertical price fixing?
-
You start out by driving 118 miles north in 4 hours and 36 minutes, and then you stop and park for a while. Finally you drive another 47 miles north in 3 hours and - minutes. The average velocity for...
-
Yea 3 r 200 3 2. Based on the information provided above, An Analyst compiled the following information of that firm, which is currently rated "BBB". Ratio Analysis of Benchmark for Industry average...
-
BC 60.0 A C No 0.500 m -x Cuc (a) Three point charges, A = 1.50 C, B = 6.50 C, and C = -4.35 C, are located at the corners of an equilateral triangle as in the figure above. Find the magnitude and...
-
4 . 4 . Effective measures to reduce discrimination are: a ) ) Enforcing non - discrimination policies b ) ) Providing diversity training c ) ) Promoting inclusive hiring practices d ) ) Regularly...
-
AMNESTY PARDON Co. has a post-employment benefits plan that is considered a defined contribution plan. According to the plan, AMNESTY agrees to contribute P800,000 annually to a retirement fund for...
-
Noah, a single parent, has a gross income tax liability of $8,000. He made estimated tax payments of $5,900 during the year. Noah also determined that he is entitled to claim a child tax credit of...
-
What is your opinion of advertising awards, such as the Cannes Lions, that are based solely on creativity? If you were a marketer looking for an agency, would you take these creative awards into...
-
Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost...
-
You're prepared to make monthly payments of $240, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your...
-
You want to borrow $96,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,950, but no more. Assuming monthly compounding, what is the highest APR you can...
-
A skier glides down a frictionless hill of 100 meters high, then ascends another hill, with a height of 90 meters, as shown in the figure below. a) What is the speed of the skier when they reach the...
-
The atoms in a nickel crystal vibrate as harmonic oscillators with an angular frequency of 5.5x 1013 rad/s. The mass of a nickel atom is 9.75 x 10-26 kg. What is the difference in energy between...
-
Ballistic pendula are used by forensic analysts to calculate the velocity of a bullet. The bullet is shot into a target suspended by a long, thin, narrow rod; the degree to which the pendulum is...
Study smarter with the SolutionInn App