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Rainbow Painting Company is considering whether to purchase a new spray paint machine that costs $8,000. The machine is expected reduce labor costs by $1,600 per year and no salvage value. The machine is expected to have a useful life of 10 years. The unadjusted rate of return for this investment is

a. 16%
b. 20%
c. 40%
d. Some other amount.

Respuesta :

TomShelby

Answer:

d other amount

Explanation:

We have to solve for the rate of a 10-years annuity of 1,600 dollars with an investment of 8,000

We solve this using excel or a financial calculator

we write the PV fuction on excel and make a link in the rate argument

then use the goal seek tool to make the PV equal to 8,000 by iteration of rate value

This give us:

[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]

C 1,600.00

time 10

rate 0.15098

[tex]1600 \times \frac{1-(1+0.15098)^{-10} }{0.150984} = PV\\[/tex]

PV $8,000.0000

the rate of return was 15.10% as is not an option the correct answer is D

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