Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts. the machine generates, on average. $7,900 per year in additional net income What is the average accounting return for this machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g.. 32.16).) Solution Answer: Calculation of the average accounting return for this machine: AAR=(Average Annual Profit after tax/Average investment over the life of the Project)*100 =($7900/$73000)*100 =10.82%.

1. Your firm is considering the introduction of a new product, and you arc required to set the price.
You are considering three price strategies: HIGH ($6.00), MEDIUM ($4.00), and LOW ($2.50).
Your market research team has indicated that the probability distribution of sales at these prices
is as follows:
Solution
The NPV under three situations is as follows:
NPV under higher price
Year
Cash flow
Discount factor @12.5%
Discounted flows
0
-22000
0.8888
-19,554
1
4500
0.7901
3,555
2
10200
0.7023
7,163
-8,835
NPV under medium price
Year
Cash flow
Discount factor @12.5%
Discounted flows
0
-22000
0.8888
-19,554
1

2. 3600
0.7901
2,844
2
6500
0.7023
4,565
-12,144
NPV under minimum price
Year
Cash flow
Discount factor @12.5%
Discounted flows
0
-22000
0.8888
-19,554
1
-3125
0.7901
-2,469
2
-4500
0.7023
-3,160
-25,183
Working is as follows:
Higher price
Medium price
Low price
Sales
Probability
Net sale
Sales
Probability
Net sale

3. Sales
Probability
Net sale
Year 1
3500
0.1
2100
5000
0.2
4000
10000
0.4
10000
2500
0.3
4500
4000
0.5
8000
7500
0.3
5625
1500
0.6
5400
3000
0.3
3600
5000
0.3
3750
12000
15600
19375
Less:
Variable costs

4. 7500
12000
22500
Profit
4500
3600
-3125
Year 2
5000
0.2
6000
8000
0.3
9600
12000
0.3
9000
4000
0.3
7200
6500
0.4
10400
9000
0.5
11250
3000
0.5
9000
5000
0.3
6000
7500
0.2
3750
12000

5. 22200
26000
24000
Less:
Per unit variable cost
19500*1
12000
19500
28500
Profit
10200
6500
-4500
Hence it is recommended to go for savings in bonds.
NPV under higher price
Year
Cash flow
Discount factor @12.5%
Discounted flows
0
-22000
0.8888
-19,554
1
4500
0.7901
3,555
2
10200
0.7023
7,163
-8,835