Question

Rainbow Painting Company is considering whether to purchase a new spray paint machine that costs $8,000. The machine is expected reduce labor costs by $1,600 per year and no salvage value. The machine is expected to have a useful life of 10 years. The unadjusted rate of return for this investment is

a. 16%
b. 20%
c. 40%
d. Some other amount.

Answer 1

d other amount

Step-by-step explanation:

We have to solve for the rate of a 10-years annuity of 1,600 dollars with an investment of 8,000

We solve this using excel or a financial calculator

we write the PV fuction on excel and make a link in the rate argument

then use the goal seek tool to make the PV equal to 8,000 by iteration of rate value

This give us:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 1,600.00

time 10

rate 0.15098

`1600 * (1-(1+0.15098)^(-10) )/(0.150984) = PV\\`

PV $8,000.0000

the rate of return was 15.10% as is not an option the correct answer is D