Question

A company is evaluating three possible investments. Each uses the straightminusline method of depreciation. The following information is provided by the​ company: Project A Project B Project C Investment $ 220 comma 000 $ 54 comma 000 $ 220 comma 000 Residual value 0 28 comma 000 36 comma 000 Net cash​ inflows: Year 1 64 comma 000 36 comma 000 94 comma 000 Year 2 64 comma 000 27 comma 000 64 comma 000 Year 3 64 comma 000 23 comma 000 74 comma 000 Year 4 64 comma 000 20 comma 000 34 comma 000 Year 5 64 comma 000 0 0 What is the accounting rate of return for Project​ C? (Round your answer to two decimal​ places.)

Answer 1

Answer:

Accounting rate of Return 22.28%

Explanation:

ARR:

$\frac{average \: income}{average \: investment}$

Project C:

investment    220,000

residual value 36,000

cash flow:

Year 1: 94,000

Year 2: 64,000

Year 3: 74,000

Year 4: 34,000

average cash flow:

(94,000 + 64,000 + 74,000 + 34,000)/4 = 66,500

depreciable amount:

220,000 - 36,000 = 184,000

depreciation per year: 184,000 / 4 = 46,000

net average operating income: 20,500

average investment:

220,000 - 36,000 = 184,000 / 2 = 92,000

ARR:

20,500 / 92,000 = 0,22282 ? 22.28%