In: Accounting
A) The company where you work as Finance Director works on two different projects to increase sales volume and efficiency. Your estimations and expectations regarding the projects are as follows. After you have proven mathematically which project you choose why? please explain your decision
Project A:
Project B:
B) Let's assume that we are evaluating a project with ARR (Accounting Rate of Return) technique and we have to make a pre-investment of $ 4m for this project. The investment has a nine-year lifetime, and at the end of nine years, the carrying amount will be only $400,000 (with the straight-line depreciation assumption). Calculate and explain ARRINITIAL and ARRAVERAGE BOOK VALUE for this project. Also, describe the problems encountered in the ARR technique as items
Time |
NET REVENUE (INCOME) |
BOOK VALUE |
0 |
----- |
$4,000,000 |
1 |
$350,000 |
$3,600,000 |
2 |
$320,000 |
$3,200,000 |
3 |
$270,000 |
$2,800,000 |
4 |
$240,000 |
$2,400,000 |
5 |
$210,000 |
$2,000,000 |
6 |
$180,000 |
$1,600,000 |
7 |
$140,000 |
$1,200,000 |
8 |
$90,000 |
$800,000 |
9 |
$60,000 |
$400,000 |