Question

You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation.   

(v) Internal Rate of Return (IRR in %)                                                              (1 mark)

(vi) Average Accounting Return (AAR in %)

Answer 1

Solution:-

To Calculate Internal Rate of Return-

Internal Rate of Return is 24.82%

To Calculate Average Accounting Return-

Average Accounting Return =

Average Net Income =

Average Net Income = $1,17,000

Average Accounting Return =

Average Accounting Return = 17.21%

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