Crichton Publications uses the accounting rate of return method to evaluate prop

Question

Crichton Publications uses the accounting rate of return method to evaluate proposed capital investments. The company’s desired rate of return is 18%. The project being evaluated involves a new product that will have a three-year life. The investment required is $300,000, which consists of a $240,000 machine, and inventories and accounts receivable totaling $60,000. The machine will have a useful life of three years and a salvage value of $150,000. The salvage value will be received during the fourth year, and the inventories and accounts receivable related to the product also will be converted back to cash in the fourth year. Accrual accounting net income from the product will be $87,000 per year, before depreciation expense, for each of the three years. Because of the time lag between selling the product and collecting the accounts receivable, cash flows from the product will be: Table 6-4 (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)

Explanation / Answer

Initial Investment = $300,000

Annual Depreciation = (240,000-150,000)/3

= $30,000

Average Accounting Income = 87000-30,000

= 57,000

..

Accounting Rate of Return = Average Accounting Income/Initial Investment * 100

= 57,000/3,00,000 * 100

= 19%

..

Since , the accounting rate of return from the project is greater then the required accounting rate of return

therefore the project is viable and should be accepted.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.