Question

1. A company buys a machine for $72,000 that has an expected life of 4 years and no salvage value. The company anticipates a yearly net income of $3,450 after taxes of 30%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?

a. 6.71% b. 9.58% c. 4.79% d. 2.87% e. 19.17%

2. Park Co. is considering an investment that requires immediate payment of $35,000 and provides expected cash inflows of $12,000 annually for four years. What is the investment's payback period?

	Payback Period Choose Numerator: / Choose Denominator: = Payback Period / = Payback period =

3. Project A requires a $425,000 initial investment for new machinery with a five-year life and a salvage value of $38,500. The company uses straight-line depreciation. Project A is expected to yield annual net income of $27,000 per year for the next five years.

Compute Project A’s accounting rate of return.

	Accounting Rate of Return Choose Numerator: / Choose Denominator: = Accounting Rate of Return Annual after-tax net income / Annual average investment = Accounting rate of return

Answer 1

Solution for :1

Correct .answer is (b) 9.58%

accounting rate of return = net income / average investment

accounting rate of return = 3450/36000 = 9.58%

Calculation of Annual Average Investment
		Year-1	Year-2	Year-3	Year-4	Total
Investment at the beginning of year (a)		72000	54000	36000	18000
Less Depreciation		18000	18000	18000	18000
Investment at the end ofyear (b)		54000	36000	18000	0
Average Investment (a+b)/2		63000	45000	27000	9000	144000
Annual Average Investment= 144000/4=$36000

Solution for :2

payback period = intial investment / cash flow per period

cash flow per period =$12000

payback period = 35000 / 12000 = 2.92 years

Payback Period will be 2.92 year

Solution for :3

accounting rate of return = net income / average investment

accounting rate of return = 27000/ 231750= 11.65%

		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Investment at the beginning of year (a)		425000	347700	270400	193100	115800
Less Depreciation		77300	77300	77300	77300	77300
Investment at the end ofyear (b)		347700	270400	193100	115800	38500
Average Investment (a+b)/2		386350	309050	231750	154450	77150	1158750
Annual Average Investment= 1158750/5=$231750
Depreciation=(425000-38500)/5 =$77300