Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per
Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Question #4
Iceland Corporation Limited is considering
investing in one of two machines – A or B.
The initial cost and net cash inflows from
each project are shown below. The
opportunity cost for both projects is 10% per
cent.
Cash Flow
Machine A
Machine B
$
2$
Initial Cost
(6 000 000)
(4 500 000)
Net Cash
Inflows
1 000 000
1 300 000
1 400 000
1 600 000
Year 1
Year 2
1 600 000
1 600 000
1 200 000
Year 3
2 300 000
1 200 000
1 200 000
Year 4
Year 5
Required:
a) Calculate the ARR on initial capital for
machine A and machine B.
b) Calculate the ARR on average capital for
machine A and machine B.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd019ca93-89e5-493f-9c1b-acc5da9d801d%2F61ccd24f-24d6-4c33-894d-5b20f92c251c%2F7o2t3and_processed.png&w=3840&q=75)
Transcribed Image Text:Question #4
Iceland Corporation Limited is considering
investing in one of two machines – A or B.
The initial cost and net cash inflows from
each project are shown below. The
opportunity cost for both projects is 10% per
cent.
Cash Flow
Machine A
Machine B
$
2$
Initial Cost
(6 000 000)
(4 500 000)
Net Cash
Inflows
1 000 000
1 300 000
1 400 000
1 600 000
Year 1
Year 2
1 600 000
1 600 000
1 200 000
Year 3
2 300 000
1 200 000
1 200 000
Year 4
Year 5
Required:
a) Calculate the ARR on initial capital for
machine A and machine B.
b) Calculate the ARR on average capital for
machine A and machine B.
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