Hearne Company has a number of potential capital investments. Because these proj

Question

Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used.

Project 1: Retooling Manufacturing Facility

This project would require an initial investment of $5,150,000. It would generate $919,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,072,000.

Project 2: Purchase Patent for New Product

The patent would cost $3,610,000, which would be fully amortized over five years. Production of this product would generate $559,550 additional annual net income for Hearne.

Project 3: Purchase a New Fleet of Delivery Trucks

Hearne could purchase 25 new delivery trucks at a cost of $145,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,600. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $561,900 of additional net income per year.

Required:

1. Determine each project's accounting rate of return (Round your answers to 2 decimal places.)

Required:

1. Determine each project's accounting rate of return (Round your answers to 2 decimal places.)

Accounting Rate of Return Project 1 % Project 2 % Project 3 %

Explanation / Answer

ARR= average accounting profit/Avg Investment 1 2 3 Investment    5,150,000 3,610,000 3,625,000 Net cashflow       919,000 Depreciation       509,750 Profit       409,250 559,550 561,900 ARR= average accounting profit/Avg Investment 7.95% 15.50% 15.50% Workings Salvage value    1,072,000 140,000.00 useful life                    8                 10 Dep       509,750      348,500

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