Do It! Review 24-4 Wallowa Company is considering a long-term investment project

ID: 2492187 • Letter: D

Question

Do It! Review 24-4

Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,560. It will have a useful life of 4 years and no salvage value. Annual revenues would increase by $80,770, and annual expenses (excluding depreciation) would increase by $40,460. Wallowa uses the straight-line method to compute depreciation expense. The company’s required rate of return is 14%.

Compute the annual rate of return. (Round answer to 0 decimal places, e.g. 15%.)

Determine whether the project is acceptable?

Annual rate of return

Explanation / Answer

Annual rate of return = expected annual income / average investment

Depreciation = 120,560 /4 = 30,140

Annual income = 80,770 – (40,460 +30,140)

=10,170

Average investment = 120,560/2

= 60,280

=10,170/60,280

= 16.87%

Project is acceptable