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ABC Company is considering the purchase of a new machine that would cost $500,000

Accounting

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ABC Company is considering the purchase of a new machine that would cost $500,000. The machine would have a useful life of 10 years. ABC Company plans on using straight-line depreciation with an estimated salvage value of $0. ABC Company has a hurdle rate of 10% and is subject to an income tax rate of 40%. The annual cash income is estimated to be $125,000.

 

1.    The Accounting Rate of Return (AROR) is:

 

A.  7%

B.   8%

C.   9%

D.  10%

 

 

2.    The Net Present Value (NPV) is:

 

A.  $63,775

B.   $73,775

C.   $83,775

D.  $93,775

 

3.    The Profitability Index (PI) is:

 

A.  1.17

B.   1.27

C.   1.37

D.  1.47

 

 

4.    The Payback period is:

A. 5.263 years

B. 6.263 years

C. 7.263 years

D. 8.263 years

 

 

5.    Using interpolation, the Internal Rate of Return (IRR) is:

 

A.  10.78%

B.   11.78%

C.   12.78%

D.  13.78%