A company is evaluating three possible investments. Each uses the straight-line method of depreciation. The following information is provided by the company:

Project A

Project B

Project C

Investment

$240,000

$54,000

$240,000

Residual value

0

10,000

36,000

Net cash flows:

Year 1

52,000

40,000

96,000

Year 2

52,000

31,000

66,000

Year 3

52,000

27,000

76,000

Year 4

52,000

24,000

36,000

Year 5

52,000

0

0

What is the accounting rate of return for Project C? (Round your answer to two decimal places.)

A.12.50%

B.15.00%

C.44.44%

D.12.68%

Question

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Respuesta :

cancinodavidq cancinodavidq · Answer 1 · 2019-12-20T20:06:26+01:00

Answer:

Consider the following calculations

Explanation:

Annual Depreciation for Project C = ($240,000- $36,000) / 4 = $51,000

Average Net Cash Flows for Project C = (96000 +66000 + 76000+36000) / 4 = $68,500

Average Accounting Profit = Average Net Cash flows - Annual Depreciation = $68500- $51000 = $17,500

Average Investment = (Initial Investment + Salvage Value) / 2 = ($240000 + $36000) /2 = $138,000

Accounting rate of return = Average Accounting Profit / Average Investment = $17500 / $138000 = 12.68%