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Verizon [17]
3 years ago
12

Harris Co. is considering a 12-year project that is estimated to cost $900,000 and has no residual value. Harris seeks to earn a

n average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Harris Co.
Business
1 answer:
masha68 [24]3 years ago
3 0

Answer:

annual income = $70,292.52

Explanation:

initial outlay $900,000

in order to determine the net cash flows per year we can use the present value of an ordinary annuity:

PV = annual cash flow x annuity factor

  • PV = $900,000
  • annuity factor, 15%, 12 years = 6.1944

annual cash flow = $900,000 / 6.1944 = $145,292.52

annual cash flow = [(revenue - operating costs - depreciation) x (1 - tax rate)] + depreciation

  • revenue - operating costs - depreciation = annual income
  • tax rate = 0?
  • depreciation = $900,000 / 12 = $75,000

$145,292.52 = annual income + $75,000

annual income = $145,292.52 - $75,000 = $70,292.52

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