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 = $????? = ____%