Question

Hardware is adding a new product line that will require an investment of $ 1 comma 476 comma 000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 300 comma 000 the first​ year, $ 290 comma 000 the second​ year, and $ 240 comma 000 each year thereafter for eight years. Assume the project has no residual value. Compute the ARR for the investment. Round to two places

Answer 1

Answer:

42,51%

Explanation:

Accounting Rate of Return (ARR) = Average Profits / Average Investment

Calculation of Average Profits

Average Profit = Sum of Profits / Number of Years

                        = (300,000+290,000+240,000×8)/10

                        = $2,510,000 / 8

                        = $313,750

Calculation of Average Investment

Average Investment = Initial Investment + Scrape Value / 2

                                  = $1,476,000/2

                                  = $738,000

Accounting Rate of Return (ARR) = $313,750/$738,000×100

                                                      = 42,51%