Question

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%

Answer 1

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%