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

question 127

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 accounting (book) rate of return (to two decimal places) based on average investment for this proposed investment is:

• A) 12.73%.
• B) 14.00%.
• C) 25.45%.
• D) 28.00%.
• E) 50.90%.

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Definitions:

Secretly

The act of keeping something hidden or undisclosed from others.

Enlightened Self-interest

The understanding that actions which appear to benefit others can also indirectly benefit oneself, leading to outcomes that are advantageous for all parties involved.

Classical Economic

A school of thought in economics that emphasizes the importance of free markets, competition, and the self-regulating nature of economies.

Socioeconomic

Relating to or concerning the interaction of social and economic factors.