Olsen Inc Purchased a $600,000 Machine to Manufacture a Specialty Tap

question 147

Multiple Choice

Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the next 10 years. To encourage capital investments, the government exempts taxes on profits from new investments in this type of machinery. This legislation most likely will remain in effect in the foreseeable future. The equipment is expected to have 10 years of useful life and no salvage value at the end of this 10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be $144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The estimated internal rate of return (IRR) on this proposed investment is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

• A) Less than 10%.
• B) 10%.
• C) 12%.
• D) Greater than 12%.
• E) Indeterminable based on the information provided.

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Definitions:

Adhocracy Culture

An organizational culture characterized by flexibility, employee empowerment, and an emphasis on innovation, often seen in dynamic and creative industries.

Flexibility

The quality of being able to adapt to new, different, or changing requirements.

Discretion

The freedom to decide or act according to one's own judgment.

Competing Values Framework

A model that categorizes organizational cultures based on two dimensions: flexibility versus stability and internal versus external focus, highlighting the competing demands organizations face.