A Metal Fabricator Requires a Return of 11

Multiple Choice

A metal fabricator requires a return of 11%. The company is considering the purchase of six 40-ton hydraulic shop presses at a cost of $11,300 each. The profit before depreciation over the next ten years is projected at $5,700, $6,800, $7,200 and $8,500 for the first four years and then expected to be $9,700 for the next six years. Depreciation is straight-line with a residual value of $13,400. Which of the following should you advise the metal fabricator do?

A) Invest because the ARR shows a positive return of 6.8%.
B) Invest because ARR is 10.7% over the required rate.
C) Not invest because ARR shows a return of (1.9%) .
D) Invest as ARR shows a positive return of 13.4%.
E) Not invest as ARR is underachieved by 6.4%.