The Management of London Corporation Is Considering the Purchase of a New

question 27

Multiple Choice

The management of London Corporation is considering the purchase of a new machine costing $750,000.The company's desired rate of return is 6%.The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 37,500 & \$ 187,500 \\2 & 37,500 & 187,500 \\3 & 37,500 & 187,500 \\4 & 37,500 & 187,500 \\5 & 37,500 & 187,500\end{array}$$ ? The cash payback period for this investment is:

• A) 3 years.
• B) 5 years.
• C) 20 years.
• D) 4 years.

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Definitions:

Confidence Interval

A range of values, derived from sample statistics, that is likely to contain the value of an unknown population parameter with a certain level of confidence.

Population Standard Deviation

A measure of the dispersion or variability within a total population, quantifying how much the individual data points differ from the population mean.

Average Income

Average income is the total income divided by the number of entities in the group, providing a simple measure of the economic well-being of a population.

Confidence Interval

An interval of values, obtained from sample observations, that is likely to include the actual population parameter within a specified confidence level.