Final answer:
The average rate of return (ARR) for the investment in a new machine by Putnam Industries is calculated to be 10%, which is determined by dividing the average annual income of $15,000 by the initial investment cost of $150,000, and then multiplied by 100.
Step-by-step explanation:
The student has asked to compute the average rate of return (ARR) for a new machine investment by Putnam Industries. To calculate the ARR, we will use the formula which is the average annual profit divided by the initial investment cost, and then multiply by 100 to get a percentage.
The total income generated over the machine's lifespan is $120,000, and since there is no residual value and the machine will be used over an 8-year period, the average annual income is $120,000 / 8 = $15,000. The initial cost of the machine is $150,000. Therefore, the ARR is calculated as follows:
ARR = ($15,000 / $150,000) × 100 = 10%
In this case, the ARR for the investment is 10%, which is below the company's hurdle rate of 15%. This result indicates that the investment may not meet the company's minimum required rate of return for investments.