Pearl Manufacturing Is Considering an Investment in Equipment Costing $660,000

question 131

Multiple Choice

Pearl Manufacturing is considering an investment in equipment costing $660,000. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $120,000. The investment is expected to generate annual net cash inflows of $135,000 for 8 years. Using the rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve a 14% rate of return?

• A) $18,900
• B) $37,800
• C) $54,600
• D) $92,400

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Definitions:

Operation Indicated

The mathematical operation (such as addition, subtraction, multiplication, or division) suggested by the context of a problem or equation.

Percentage

A portion or share expressed as a fraction of 100.

Net Amount

The final amount remaining after all deductions, like taxes and fees, have been subtracted from the gross amount.

Collect Like Terms

A mathematical process to simplify algebraic expressions by combining constants and variables that are the same.