Answer:
Interest expense = $20,000
Explanation:
Loan Amortization: A loan repayment method structured such that a series of equal periodic installments will be paid for certain number of periods to offset both the loan principal amount and the accrued interest.
The annual installment is computed as follows:
Annual installment= Loan amount/annuity factor
Annual installment is already given as = 37,258 (already given)
Interest payment = interest rate × Loan balance at the beginning of the year
DATA
Interest rate = 8%
Loan balance at the beginning of the year = $250,000
Interest expense = 8%× 250,000 = $20000
Principal paid = Annual installment - Interest = 37,258-20,000 = 17,258 (this is not required but to explain the concept)
Interest expense = $20,000
The Bob Buckham Senior Center, a not-for-profit entity, serves a hot meal to senior citizens every Friday evening. All the food is donated by a local supermarket. All the food preparation and serving is done by local volunteers. If the Center had to pay for the food, it would need to spend $10,000 a year. If it had to pay for the food preparation and service, it would need to spend $12,000 a year. How should it report these contributions in its financial statements?
Food | Food preparation and service
a. Disclose in the notes | Disclose in the notes
b. Disclose in the notes | Report $12,000 revenue and expense
c. Report $10,000 revenue and expense | Disclose in the notes
d. Report $10,000 revenue and expense | Report $12,000 revenue and expense
Answer:
c. Report $10,000 revenue and expense | Disclose in the notes
Explanation:
Not-for-profit entities must report the fair value of all the goods they receive as donations. in this case, they would have to report the $10,000 worth of food received from a local supermarket. But they are not required to report the value of volunteer work, they only have to disclose it on the footnotes of their financial statements.
Buckson Framing's cost formula for its supplies cost is $1,350 per month plus $18 per frame. For the month of June, the company planned for activity of 716 frames, but the actual level of activity was 713 frames. The actual supplies cost for the month was $14,820. The supplies cost in the flexible budget for June would be closest to:
Answer:
c. $ 14,238
Explanation:
Computation of costs in the flexible budget
Planned activity 716 units
Budgeted cost per unit $ 18 per frame
Total planned variable cost - 716 units * $ 18 $ 12,888
Fixed monthly cost $ 1,350
Total supplies cost in flexible budget for June $ 14,238
The other information regarding the actual costs and actual production are not required for determining the budgted cost for supplies.
A trader maintains a position in a small capitalization stock that has low trading volume. The trader has a high level of which of the following risks?
A) MarketB) LiquidityC) BusinessD) Inflation
Answer:
B) Liquidity
Explanation:
Liquidity is the ability of quickly buy or sell a stock without any price change.
Liquidity in a small-capitalization stock that has low trading volume is generally low that causes a problem for traders. It is so because in small capitalization, traders are unable to understand potential pitfalls and blindly invest in small-capitalization stocks which do not give profit as expected and the liquidity becomes low.
Hence, the correct answer is B) Liquidity.
Which of the following do you NOT include when calculating the closing balance of PP&E?
a) Cash capital expenditures
b) PP&E acquired through acquisitions
c) PP&E acquired under capital or financing leases
d) Changes in working capital
Answer:
d) Changes in working capital
Explanation:
the formula used for calculating net PP&E is:
Net PP&E = gross PP&E + capital expenditures - accumulated depreciation
PP&E represents fixed assets (plant, property, and equipment).
On the other hand, working capital involves current assets and liabilities such as cash, accounts receivables, accounts payable, inventories, taxes payable, etc.
You must decide between $25,000 in cash today or $30,000 in cash to be received two years from now. If you can earn 8 percent interest on your investments, which is the better deal?
Answer:
The deal to receive $30000 is better.
Explanation:
To find the better deal we need to calculate the present value of $30000 and then compare it with the amount $25000. If the amount is greater than the $25000, then the amount should be received after the 2 years.
The given time period (n )= 2
Interest rate (r ) = 8%
The amount received after 2 years = $30000
[tex]\text{Present value of money} = \frac{Future \ value}{(1 + r)^n } \\= \frac{30000}{(1+0.08)^2} \\= $25720.16[/tex]
Since the amount is more than $25000 so the deal to receive the money after 2 years will be better.
People had been expecting the price level to be 140 but it turns out to be 138. Johnson Family Restaurants increases the number of workers it employs. What could explain this
Answer:
neither sticky wage theory nor sticky price theory
Explanation:
People had been expecting the price level to be 140 but it turns out to be 138. Johnson Family Restaurants increases the number of workers it employs. Sticky wage theory nor sticky price theory could explain this.
What makes wages and prices sticky?Sticky wages are a result of a number of factors, including the minimum wage, employee contracts, labor unions, the efficiency wage theory, and the expense of hiring and terminating employees. It is challenging to exit a recession when wages and prices are stuck, creating a vicious cycle.
A theoretical market condition known as "stickiness" occurs when a certain nominal price resists change. Stickiness, also known as price stickiness, is a term that is frequently used to describe market prices even though it frequently refers to wages.
Many economists think that prices are "sticky" and that they change gradually. According to them, this stickiness indicates that changes in the money supply have an effect on the real economy, causing changes in investment, employment, output, and consumption. Policymakers can take advantage of this effect.
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Garcia Co. sells snowboards. Each snowboard requires direct materials of $105, direct labor of $35, and variable overhead of $50. The company expects fixed overhead costs of $645,000 and fixed selling and administrative costs of $111,000 for the next year. It expects to produce and sell 10,500 snowboards in the next year.
Required:
What will be the selling price per unit if Garcia uses a markup of 15% of total cost?
Answer:
Selling price = $301.3
Explanation:
The selling price would be determined by adding the total unit cost to the mark- up.
Mark up is the proportion of cost that is to be earned as profit.
Selling price = Total unit cost + Profit
Profit = 25% × unit cost
Selling price = Unit cost + Mark-up
Selling price = Unit cost + (15%× unit cost)
Total unit cost =Variable cost + unit fixed cost
Total fixed cost = 645,000 + 111,000 = 756,000
Unit fixed cost = $756,000 /10,500 =×72
Total unit cost = 105 + 35 + 50 + 72 = 262
Selling price = 262 + ( 15% + 262) = 301.3
Selling price = $301.3
In the liquidation of a partnership, any gain or loss on the realization of non-cash assets should be allocated:_____.
a. first to creditors and the remainder to partners.
b. to the partners on the basis of their capital balances.
c. only after all creditors have been paid.
d. to the partners on the basis of their income-sharing ratio.
Answer:
D. To the partners on the basis of their income-sharing ratio.
Explanation:
Partnership liquidation can be easily seen to come into existence indefinitely through periodic changes within the ownership, they are seen to occur by circumstances which are totally uncommon occurrence.
The form of the dissolution is irrelevant, whether by absenting by personal decision of individual member or wholesale departure and formal liquidation. The end result will be the same. The primary dream of these harmonious and synchronical growth of the firm will be seen to come to an end.
This is why it is best shared to the partners on the basis of their income sharing ratio.
Which of the following statements regarding fiscal policy are true according to the macroeconomic consensus in the United States?
a. Congress, not the Federal Reserve, should be in charge of monetary policy.
b. Expansionary monetary policies should be used to keep unemployment below its natural rate.
c. Monetary policy should focus on price stability.
Answer: Monetary policy should focus on price stability.
Explanation:
The statements regarding fiscal policy that is true according to the macroeconomic consensus in the United States is that monetary policy should focus on price stability.
The statements that Congress, not the Federal Reserve, should be in charge of monetary policy and that Expansionary monetary policies should be used to keep unemployment below its natural rate are both wrong.
Discounted payback period. Given the following two projects and their cash flows, LOADING..., calculate the discounted payback period with a discount rate of %, %, and %. What do you notice about the payback period as the discount rate rises? Explain this relationship. With a discount rate of %, the cash outflow for project A is:
Answer:
the numbers are missing, so I looked for a similar question:
Cash Flow A B
Cost $10,000 $105,000
Cash flow year 1 $3,571 $21,000
Cash flow year 2 $3,571 $10,500
Cash flow year 3 $3,571 $42,000
Cash flow year 4 $3,571 $31,500
Cash flow year 5 $3,571 $5,250
Cash flow year 6 $3,571 $0
With a discount rate of 5%, 10% & 15%
Discounted cash flows for project A:
5% 10% 15%
Cost $10,000
Cash flow year 1 $3,571 $3,401 $3,246 $3,105
Cash flow year 2 $3,571 $3,239 $2,951 $2,700
Cash flow year 3 $3,571 $3,085 $2,683 $2,348
Cash flow year 4 $3,571 $2,938 $2,439 $2,042
Cash flow year 5 $3,571 $2,798 $2,217 $1,775
Cash flow year 6 $3,571 $2,665 $2,016 $1,544
discounted payback period:
5% = 3.09 years
10% = 3.46 years
15% = 3.9 years
The higher the discount rate, the longer the discounted payback period.
Discounted cash flows for project B:
5% 10% 15%
Cost $105,000
Cash flow year 1 $21,000 $20,000 $19,091 $18,261
Cash flow year 2 $10,500 $9,524 $8,678 $7,940
Cash flow year 3 $42,000 $36,281 $31,555 $27,616
Cash flow year 4 $31,500 $25,915 $21,515 $18,010
Cash flow year 5 $5,250 $4,114 $3,260 $2,610
discounted payback period:
5% = more than 5 years, the project's NPV is negative -$9,166.37
10% = more than 5 years, the project's NPV is negative -$20,901.42
15% = more than 5 years, the project's NPV is negative -$30,563.54
A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm’s current fixed costs are $9,000 and current marginal cost are $15. The firm currently charges $18 per unit.
Required:
If the interest rate is 5% then. what is the present value of the cash flows?
Answer:
$51,020.40
Explanation:
We use the formula PV = FV * (1 + r)^n for finding the present value
There are two cash flows, one that occur in year 1 at $25,000 and second that occur in year 2 at $30,000.
Find the PV of this cash flow at r = 5% and n = 1 and 2 =
25000(1+5%)^-1 + 30000(1 + 5%)^-2
25,000(1+0.05)^-1 + 30,000(1 + 0.05)^-2
25,000(1.05^)-1 + 30,000(1.05)^-2
25,000(0.952381) + 30,000(0.907029)
23,809.525 + 27,210.87
=$51,020.40
Thus, the present value of the cash flows is $51,020.40
Suppose that on August 14, 2019, an antique woven rug handmade in Canada is priced at CAD 1,100. The approximate U.S. dollar price of the rug would be
Answer:
USD 825.95Explanation:
Step one:
To tackle this problem we need data from historical chart.
From historical chart, on August 14, 2019, 1 USD is equivalent to CAD 1.3318
Step two:
From the historical data we need to perform conversion on the data to get the USD equivalent of the CAD given in the problem
Hence
if 1 USD = CAD 1.3318 then
x USD = CAD 1,100
by cross multiplying we have
x USD= 1,100/ 1.3318
x USD= 825.95
Hence as at August 14, 2019 CAD 1,100 is USD 825.95
Hughey Co. as lessee records a capital lease of machinery on January 1, 2011. The seven annual lease payments of $350,000 are made at the end of each year. The present value of the lease payments at 10% is $1,704,000. Hughey uses the effective-interest method of amortization and sum-of-the-years'-digits depreciation (no residual value). Round to the nearest dollar.
a) Prepare an amortization table for 2 011 and 2012.
b) Prepare all of Hughey's journal entries for 2011.
Answer:
Both requirements are solved below
Explanation:
An amortization table can be made as follows
DATA
Lease term = 7years
annual lease payments = $350,0000
Present value of the leases payment = $1,704,000
Implicit interest rate = 10%
Requirement A Amortization table for 2011 and 2012
Date Annual payment Effective decreased Balance
interest liability $1,704,000
12/31/11 $350,000 $170,400 $179,600 $1524,400
12/31/12 $350,000 $152,440 $197,560 $1,326,840
Requirement B journal entries for 2011
January 1
Entry
DEBIT CREDIT
Leased machinery $1,704,000
Lease liability $1,704,000
December 31
Entry
DEBIT CREDIT
Interest expense $170,400
Lease liability $179,600
Cash $350,000
December 31
Entry
DEBIT CREDIT
Depreciation expense(w) $426,000
Accumulated depreciation $426,000
Working
Sum of the years = (7+6+5+4+3+2+1) = 28
Cost = $1,704,000
Residual value = $0
Estimated life = 7years
Depreciation expense = $1,704,000 x 7/28
Depreciation expense = $426,000
If the current interest rate is 5% and your semi-annual coupon paying bond has a duration of 5.33 years, how much will the price of the bond change if the interest rate increases by 1 basis point?
Answer:
Percentage change in price = -5.33 * 0.00005
Explanation:
Percentage change in price = - modified duration * (Change in yield in BP/100)
Percentage change in price = -5.33 * ((0.01/2)/100)
Percentage change in price = -5.33 * (0.005/100)
Percentage change in price = -5.33 * 0.00005
Excellent Manufacturers Inc. has a current production level of 20,000 units per month. Unit costs at this level are: Direct materials $0.26 Direct labor 0.40 Variable overhead 0.16 Fixed overhead 0.21 Marketing − fixed 0.25 Marketing/distribution − variable 0.42 Current monthly sales are 18,000 units. Jax Company has contacted Excellent about purchasing 1,550 units at $2.00 each. Current sales would NOT be affected by the one−time−only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?
Answer:
The increase in operating profit is $1,829.00.
Explanation:
The rise or fall in the operating income:
= Purchase unit × ( offer price- direct material- direct labor- variable overhead)
The rise or fall in the operating income: = 1550× (2 - 0.26 - 0.4 - 0.16)
The rise or fall in the operating income: = $1829
Therefore the profit will increase by $1829
Here all the fixed cost is not considered because it is a sunk cost and variable and administrative expenses are also not considered because these costs are not going to be incurred for offer.
Kenneth Arrow discussed two important situations in which profit maximization can be socially inefficient. One of these occurs when
Answer:
Explanation:
One of these occurs when costs are not paid for, as in pollution, the other is when there is an imbalance of knowledge between buyer and seller. Pollution can be a consequence that cannot be solved with money and can also be socially irresponsible for a company. On the other hand, an imbalance of knowledge can prevent a company from profit maximization if the seller does not understand the product or services that the buyer is selling.
Yellowstone Corporation has just announced the repurchase of $125,000 of its stock. The company has 39,000 shares outstanding and earnings per share of $3.29. The company stock is currently selling for $76.09 per share. What is the price–earnings ratio after the repurchase?
Answer:
The price–earnings ratio after the repurchase is 22.18
Explanation:
First calculate Numbers of new shares
New Shares = Old Shares - ( Repurchased Shares / Price per share )
New Shares = 39,000 - ( $125,000 / $76.09 )
New Shares = 39,000 - 1,642.79
New Shares = 37,357.21 shares
New compute the old earning
Old Earning = EPS x Numbers of old shares = $3.29 x 39,000 = $128,310
New compute revised Earning per share
Revised EPS = Earning / New shares = $128,310 / 37,357.21 shares = $3.43
Now we need to calculate the Price earning ratio
P/E Ratio = Price per share / Revised earning per share = $76.09 / $3.43 = 22.18 times
g A company's most recent balance sheet reported total assets of $1.9 million, total liabilities of $0.8 million, and total equity of $1.1 million. Its Debt to equity ratio is: Group of answer choices
Answer:
0.73
Explanation:
Debt to equity ratio is calculated as Total debt / Total equity
= $0.8 million / $1.1 million
= 0.73
Therefore, debt to equity ratio is 0.73
The federal government has the legal authority to prevent a company from adding products through acquisitions if the acquisition threatens to lessen competition.
A. True
B. False
Answer:
True
Explanation:
One way of determining if acquisitions would lessen competition is through the calculation of the HHI. if the HHI of the industry is more than 1500 before the acquisition and the HHI changes by more than 50 after the acquisition, the government would challenge the merger
A large furniture and appliance rental business is considering sponsorship options. It has brought together vice-presidents from the various functional areas of the company to determine which sponsorships will most effectively reach the rental company's prospective customers. The rental company has established a:
a. cross-functional team
b. horizontally-organized team
c. vertically-organized team
d. problem-resolution team
e. project committee
Answer:
a. cross-functional team
Explanation:
In this case, the most appropriate is the use of a cross-functional team.
This team is formed by several professionals with knowledge, techniques, skills and resources to help the company achieve its goals and objectives.
The benefits of forming a cross-functional team is to aggregate the potential of each member in a common objective, which ensures greater flexibility of ideas, greater innovation, greater exchange of experiences, which guarantees greater team engagement, greater possibility of designing solutions and greater efficiency in organizational processes.
Lake Incorporated purchased all of the outstanding stock of Huron Company, paying $1,000,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were: Book Value Fair Value Current assets (net) $ 190,000 $ 125,000 Property, plant, equip. (net) 650,000 765,000 Liabilities 255,000 255,000 Lake would record goodwill of
Answer:
Lake would record goodwill of $365,000
Explanation:
Fair value of net assets = Fair value of current asset + Fair value of property, plant and equipment
Fair value of net assets = $125,000 + $765,000
Fair value of net assets = $890,000
Fair market value = Fair value of net assets - Liabilities assumed
Fair market value = $890,000 - 255,000
Fair market value = $635,000
Goodwill = Consideration - Fair market value
= $1,000,000 - $635,000
= $365,000
Hence, the amount of goodwill is $365,000.
A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should:
Answer:
contact enough dealers so that a reasonable market quote is obtained . when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes (as a contrast, FINRA requires that a minimum of 3 quotes be obtained for non-NASDAQ OTC issues, meaning OTCBB or Pink Sheet issues), nor is there a requirement to direct the customer to a dealer that physically has those bonds. The dealer would not sell short the bonds to the customer, since short covering is very difficult in the thinly traded municipal market.
Select the correct answer.
What does a production possibilities curve represent?
ОА.
a combination of price and demand of goods and services
B.
a combination of the goods produced before and after a change in a factor of production
Ос.
a combination of two factors of production used to produce a single good or service
OD
a combination of two goods that can be produced using limited resources
The statement that describes what a production possibility curve represent is: D.
What is Production Possibility Curve?Production possibility curve can be described as that which shows the quantity of two products that can possibly be produced if both products are to depend on the same resources for production to occur.The image attached below shows a typical production possibility curve.Therefore, the statement that describes what a production possibility curve represent is: D.
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Which of the following statements are TRUE regarding the sale of a long position in a restricted long margin account?
I. 50% of the proceeds of the sale are credited to SMA
II. 100% of the proceeds of the sale are credited to SMA
III. There is a 0% retention requirement of the sale for a restricted account
IV. There is a 50% retention requirement of the sale for a restricted account
a. I and III
b. I and IV
c. II and III
d. II and IV
Answer:
b
Explanation:
50% of the proceeds of the sale are credited to SMA
and
There is a 50% retention requirement of the sale for a restricted account
Sand Key Development Company estimates that it will generate an operating income of $7.25 million. Which financing option should Sand Key use?
Answer: debt financing option
Explanation:
Debt financing is a way by which an economic agent such as the individual, firm or the government gets enough money in order to meet a particular need.
Debt financing can be through loans from family and friends, personal loans, bank loans, credit cards etc. Since Sand Key Development Company estimates that it will generate an operating income of $7.25 million, the company can use debt financing.
Expected return and standard deviation. Use the following information to answer the questions: LOADING.... a. What is the expected return of each asset? b. What is the variance of each asset? c. What is the standard deviation of each asset? Hint: Make sure to round all intermediate calculations to at least seven (7) decimal places. The input instructions, phrases in parenthesis after each answer box, only apply for the answers you will type. a. What is the expected return of asset A?
Answer and Explanation:
a. The computation of expected return of each assets is shown below:-
Expected Return on Asset A in state is
= 0.39 × 0.02 + 0.45 × 0.02 + 0.16 × 0.02
= 0.02
Expected Return on Asset B in state is
= 0.39 × 0.25 + 0.45 × 0.06 + 0.16 × -0.04
= 0.1181
Expected Return on Asset C in state is
= 0.39 × 0.35 + 0.45 × 0.19 + 0.16 × -0.22
= 0.1868
b. The computation of variance of each asset is shown below:-
Variance of Assets A is
= 0.39 × (0.02 - 0.020)^2 + 0.45 × (0.02 - 0.020)^2 + 0.16 × (0.02 - 0.020)^2
= 0
Variance of Assets B is
= 0.39 × (0.25 - 0.1181)^2 + 0.45 × (0.06 - 0.1181)^2 + 0.16 × (-0.04 - 0.1181)^2
= 0.0123
Variance of Assets C is
= 0.39 × (0.35 - 0.1868)^2 + 0.45 × (0.19 - 0.1868)^2 + 0.16 × (-0.22 - 0.1868)^2
= 0.0369
c. The computation of standard deviation of each asset is shown below:-
Standard Deviation of A is
= (0.39 × (0.02 - 0.020)^2 + 0.45 × (0.02 - 0.020)^2 + 0.16 × (0.02 - 0.020)^2)^0.5
= 0
Standard Deviation of B is
= (0.39 × (0.25 - 0.1181)^2 + 0.45 × (0.06 - 0.1181)^2 + 0.16 × (-0.04 - 0.1181)^2)^0.5
= 0.1109
Standard Deviation of C is
= (0.39 × (0.35 - 0.1868)^2 + 0.45 × (0.19 - 0.1868)^2 + 0.16 × (-0.22 - 0.1868)^2)^0.5
= 0.1920
Orbit Services, Inc. pays $ 760 ,000 to acquire 30% (200,000 shares) of the voting stock of State Investments, Inc. on January 5, 2019. State Investments, Inc. declares and pays a cash dividend of $ 1.40 per share on June 14, 2019. What is the correct journal entry for the transaction on June 14, 2019?
Answer:
since Orbit's investment represents a significant influence (more than 20%) on State, we have to use the equity method for accounting for investments in other companies.
the journal entry to record the initial investment:
January 5, 2019, investment in State Investments, Inc.
Dr Investment in State Investments, Inc., 760,000
Cr Cash 760,000
When we use the equity method, cash dividends decrease the carrying value of our investments:
June 14, 2019, cash dividend received from State Investments, Inc.
Dr Cash 280,000
Cr Investment in State Investments, Inc., 280,000
Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area:
Cost of new equipment and timbers $ 380,000
Working capital required $ 120,000
Annual net cash receipts $ 135,000
Cost to construct new roads in year three $ 44,000
Salvage value of equipment in four years $ 69,000
Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 18%.
Required:
Determine the net present value of the proposed mining project. (Any cash outflows should be indicated by a minus sign.
Answer:
The net present value of the proposed mining project is - $163,621.41.
Explanation:
The Summary of Cash flows is as follows :
Year 0 : - ($ 380,000 + $ 120,000) = - $500,000
Year 1 : $ 135,000
Year 2: $ 135,000
Year 3: $ 135,000 - $ 44,000 = $91,000
Year 4: $ 135,000 + $ 69,000 + $ 120,000 = $324,000
Determine the Net Present Value of the mining project as follows :
Using a Financial Calculator, entries will be as follows
- $500,000 CFj
$ 135,000 CFj
$ 135,000 CFj
$91,000 CFj
$ 135,000 CFj
18 % I/YR
SHIFT NPV - $163,621.41
You want to make a one-time deposit today that will increase in value to $100 at the end of this year. Which rate of interest will allow you to deposit the least amount today to reach this goal
Answer:
The rate of interest is 11.111%
The Deposit should be $90 today.
The future value at the end of this year will be $100.
Explanation:
Future value of $100
Present value of $100 at 11.111% = $100/11.111 = $90
The future value of a deposit today is the value after a period of one year or so periods. The rate of interest produces the discount factor that can calculate the present value of $100. To make a one-time deposit of $90 today will increase in value to $100 using an interest rate of 11.111%.
Sager Industries is considering an investment in equipment that will replace direct labor. The equipment has a cost of $1,200,000 with a $300,000 residual value and a 10-year life. The equipment will replace three employees who has an average total wages of $180,000 per year. In addition, the equipment will have operating and energy costs of $7,500 per year.
Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.
Answer:
Average rate of return = 11%
Explanation:
Depreciation = (Cost of equipment - Residual value) / Useful years
Depreciation = (1,200,000-300,000) / 10
Depreciation = 90,000
Increase in net annual income = 180,000 - 90,000 - 7,500
Increase in net annual income = 82,500
Average investment = (1,200,000 + 300,000) / 2 = 750,000
Average rate of return = Increase in net annual income / Average investment
Average rate of return = 82,500/750,000
Average rate of return = 0.11
Average rate of return = 11%
