Question

Leeds Company has an opportunity to invest in one or two new projects. Project A requires a $350,000 investment for new machinery with a four-year life and no salvage value. Project B requires a $350,000 investment for new machinery with a three-year life and a $10,000 salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation and cash flows occur evenly throughout each year.

Project A

Sales	$350,000
Expenses:
Direct materials	49,000
Direct labor	70,000
Overhead including depreciation	126,000
Selling & administrative expenses	25,000
Tax rate	30%

Project B

Sales	$280,000
Expenses:
Direct materials	35,000
Direct labor	42,000
Overhead including depreciation	126,000
Selling & administrative expenses	25,000
Tax rate	30%

How to do the ARR below for project A and project B???

ACCOUNTING RATE OF RETURN
PROJECT A				PROJECT B
Cost of Investment		350,000		Cost of Investment		350,000
Estimated Net Income				Estimated Net Income
Book Value, beginning				Book Value, beginning
Book Value, ending				Book Value, ending
Average Book Value				Average Book Value
ACCOUNTING RATE OF RETURN				ACCOUNTING RATE OF RETURN
	IRR using Excel:				IRR using Excel:

Answer 1

	Sales	$          350,000		Sales	$          280,000
	Expenses:			Expenses:
	Direct materials	49,000		Direct materials	35,000
	Direct labor	70,000		Direct labor	42,000
	Overhead including depreciation	126,000		Overhead including depreciation	126,000
	Selling & administrative expenses	25,000		Selling & administrative expenses	25,000
	Income before tax	80,000		Income before tax	52,000
	Less: Tax at 30%	24,000		Less: Tax at 30%	15,600
	Net Income	56,000		Net Income	36,400
	ACCOUNTING RATE OF RETURN
	PROJECT A			PROJECT B
	Cost of Investment	350,000		Cost of Investment	350,000
	Estimated Net Income	56,000	A	Estimated Net Income	36,400	A
C	Book Value, beginning	350,000		Book Value, beginning	350,000
D	Book Value, ending	-		Book Value, ending	10,000
(C+D)/2	Average Book Value	175,000	B	Average Book Value	180,000	B
	ACCOUNTING RATE OF RETURN	32.00%	A/B	ACCOUNTING RATE OF RETURN	20.22%	A/B
	Net Income	56,000		Net Income	36,400
	Depreciation(350000/4)	87,500		Depreciation((350000-10000)/3)	113,333
	OCF	143,500		OCF	149,733
	Year	Cash flow		Year	Cash flow
	0	-350000		0	-350000
	1	143500		1	149,733
	2	143500		2	149,733
	3	143500		3	159,733	(SV added)
	4	143500
	IRR using Excel:	23.21%		IRR using Excel:	14.74%
		=IRR(values 0 to 4)			=IRR(values 0 to 3)