Task:
Mackenzie Corporation is evaluating a proposal to invest in a machine costing $60,000. The machine has an estimated useful life of ten years, and an estimated salvage value of $10,000. The machine will increase the company's net income by approximately $7,000 per year. All revenue and expenses other than depreciation will be received and paid in cash.
Question 1: Refer to the information above. The payback period of the machine is:
a. Four years
b. Five years
c. Six years
d. Ten years
Question 2: Refer to the information above. The expected rate of return on average investment of the machine is:
a. 10%
b. 17%
c. 20%
d. 48%
Question 3: Scott Corporation has borrowed $40,000 that must be repaid in two years. This $40,000 is to be invested in an eight-year project with an estimated annual net cash flow of $10,000. The payback period for this investment is:
a. Two years
b. Four years
c. Eight years
d. Indeterminable with the given information
Use the following to answer questions.
Task: Shawnee Labs is considering buying equipment which would enable the company to obtain a four-year research contract. The specialized equipment costs $600,000 and will have no salvage value when the four-year contract period is over. The estimated annual operating results of the project are as follows:
Revenue $650,000
Expenses (including straight-line depreciation) (600,000)
Increase in Net Income $50,000
All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.
Question 4: Refer to the information above. The payback period for the investment in equipment is:
a. 12 years
b. 3 years
c. 4 years
d. 1.2 years
Question 5: Refer to the information above. The return on average investment for this investment is approximately:
a. 33 1/3%
b. 8 1/3%
c. 66 2/3%
d. 16 2/3%