Company X purchased a new machine for 25000 $ by life span of 10 years, expecting...

Company X purchased a new machine for 25000 $ by life span of 10 years, expecting to earn 7500 $ as a yearly income from year 4 thereafter. It is assumed that its salvage value will be 31000$. Unexpectedly, from year 7 , annual income starting to decrease by 300$ , Moreover at the end of 9^th year due to a big collapse in the company the machine will be going to get rid of the production line totally(useless). Determine the real rate of return (ROR).

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Expert Solution

Solution :-

Initial Cost = $25,000

Therefore at year 0 Cash Outflow = $25,000

Now from year 4 Inflow = $7,500

But from Year 7 Inflow Reduced by $300

Therefore net inflow = $7500 - $300 = $7200

After year 9 Machine Useless

So assume salvage value at the end of year 9

Cash flow at year 9 = $6,600 + $31,000 = $37,600

Here i take assumption that salvage money received at the end of year 9

If there is any doubt please ask in comments

Rahul Sunny answered 1 year ago

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