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

question 142

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

Definitions:

Input Prices

The cost of goods, services, and materials that are used to produce other goods or services.

Suppliers' Expectations

The anticipations or beliefs of suppliers about the future conditions of the market that can influence their decisions on production and pricing.

Price of the Good

The amount of money required to purchase a specific product or service in the market.

Resources Used

This term encompasses all the inputs, including labor, capital, and natural resources, utilized in the production of goods and services.