Question

Jones Company invests in a piece of equipment that is expected to generate cash inflows of $50,000 per year over its life of 5 years. The equipment cost $100,000 and has no residual value. What is the average annual operating income from asset?

Answer 1

Answer: $30,000

Step-by-step explanation:

Given that,

Equipment cost = $100,000

Cash inflow = $50,000 per year

Total net cash inflows during the operating life of equipment:

= Cash inflow per year × no. of years

= $50,000 × 5

= $250,000

Total depreciation during operating life = $100,000

Total operating income during a operating life:

= Total net cash inflows during the operating life - Total depreciation during operating life

= $250,000 - $100,000

= $150,000

Therefore,

Average annual operating income =
`(Total\ operating\ during\ a\ life)/(Equipment\ operating\ life\ years)`

=
`(150,000)/(5)`

= $30,000