A Company Bought a Machine That Has an Expected Life

question 28

Multiple Choice

A company bought a machine that has an expected life of 7 years and no salvage value. Management estimates that this machine will generate annual after-tax net income of $540. If the accounting rate of return is 12%, what was the purchase price of the machine?

• A) $4,500
• B) $540
• C) $31,500
• D) $9,000
• E) $2,250

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Definitions:

Sun Gear

A central gear which is part of a planetary gear system, interacting with planetary gears to transmit power in automatic transmissions and other mechanisms.

Hydromechanical Transmission

A type of transmission that combines hydraulic and mechanical systems to transfer power from the engine to the wheels or other machinery.

Upshifts

The action of shifting a transmission into a higher gear, resulting in the engine running at a lower RPM for a given vehicle speed.

Throttle Position

Throttle position indicates the angle or level of opening of the throttle in an internal combustion engine, measured by a throttle position sensor to adjust fuel injection.