The accounting rate of return is calculated as: The after-tax income divided by

Question

The accounting rate of return is calculated as:

The after-tax income divided by the total investment.

The cash flows divided by the annual average investment.

The cash flows divided by the total investment.

The annual average investment divided by the after-tax income.

The Miami Community Center is trying to decide whether or not to purchase a soda machine. The following information has been obtained:

      Initial outlay   $4,500

      Annual cash inflow $2,000

      Cost of capital                  12%

      Estimated useful life     4 years

      Residual value              $1,000

What is the net present value of the soda machine? (Your answer may vary slightly from those listed below if you are using a financial calculator.)

$2,636

$2,210

$2,710

$2,000

Lightning-Bug Products Company is preparing a cash receipts schedule for the fourth quarter of 200X. Total sales for August and September of 200X are $130,000 and $110,000, respectively.

Budgeted sales for the fourth quarter of 200X follow:

Oct.         Nov.           Dec.

Budgeted total sales                   $106,000   $125,000    $149,000

25% of sales are for cash; the remaining 75% are on account. Ten percent of the sales on account are collected in the month of sale, 70% in the month following the sale, and the remaining 20% in the second month following the sale. Lightning-Bug Products does not anticipate any uncollectible accounts.

Determine the cash collected in October:

$119,480

$112,080

$132,680

$111,700

The after-tax income divided by the total investment.

The cash flows divided by the annual average investment.

The cash flows divided by the total investment.

The annual average investment divided by the after-tax income.

Explanation / Answer

Requirement 1)

Accounting rate of return = The cash flow divided by average investment

Requirement 2)

Requirement 3)

Cash sales in october $ 26500

Cash collected for on account october $ 7950

Cash collected for september $ 57750

cash collected for august $ 19500

Total cash collected $ 111700

Year Cash Flow PVF @ 12% PV 0             (4,500) 1           (4,500) 1               2,000 0.89285             1,786 2               2,000 0.79719             1,594 3               2,000 0.71178             1,424 4               3,000 0.63552             1,907 NPV            2,210

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