Question

Finch Painting Company is considering whether to purchase a new spray paint machine that costs $2,000. The machine is expected to save labor, increasing net income by $300 per year. The effective life of the machine is 15 years according to the manufacturer’s estimate. Required Determine the unadjusted rate of return based on the average cost of the investment

Answer 1

13.9%

Step-by-step explanation:

Given that:

Cost of the machine: $2,000

Net income increasing: $300

Number of years: 15 => depreciation per year: $2,000 /15 =$133

=> Average Return: $300 - $133 = $167

As we know:

Average investment (Assuming no salvage value:)

= (beginning investment + ending investing)/2

(2000 + 0 )/ 2 = 1,200

So, the unadjusted rate of return based on the average cost of the investment:

=
`(average \: return)/(average \: investment)`

= $167 / $1,200

= 0.139

= 13.9%