Madrigal Corporation purchased a new machine for $120,000. The machine has an estimated useful life of 10-years with no salvage value and a return on investment (ROI) of 15%. ROI is computed using annual cash flows and straight-line depreciation. What is the annual cash flow using the gross book value method?

The multiple choices are:

$28,000.

$21,000.

$14,000.

$30,000.

The correct option is $30,000, the last one.

Explanation:

Return on investment=net income/initial capital outlay

return on investment is 15% or 0.15

net income is unknown

initial investment is $120,000

0.15=net income/$120,000

net income=0.15*$120,000=$18,000

Annual cash flow=net income+depreciation

depreciation=cost of asset/useful life

cost of asset is $120,000 and useful life is 10

depreciation=$120,000/10=$12000

annual cash flow=$18,000+$12,000=$30,000

The annual cash flow using the gross book value method is $18,000

Explanation:

In order to calculate the annual cash flow using the gross book value method we would have to calculate the following formula:

annual cash flow = (value of new machine*ROI) / 100

Value of the new machine=$120,000

ROI=15%

annual cash flow = ($120,000 * 15%) / 100 =

annual cash flow=$18,000

The annual cash flow using the gross book value method is $18,000