12-5 Wayne Company is considering a long-term investment project called ZIP. ZIP
ID: 2500154 • Letter: 1
Question
12-5
Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $117,280. it will have a useful life of 4 years and no salvage value. Annual revenues would increase by $80,200, and annual expenses (excluding depreciation) would increase by $39,200. Wayne uses the straight-line method to compute depreciation expenses. The company's required rate of return is 17%. Compute the annual rate of return. ( Round answer to 0 decimal places, e.g.15%) Annual rate of return Determine whether the project is acceptable? the project.Explanation / Answer
Increase in Revenue = $ 80200
Less: increase in expenses = $ 39200
Less:Depreciation (117280/4) = $29320
Annual net income = $11680
Average Investment = ($117,280 + 0) / 2 = $58640
Annual rate of return = $11,680 / $58,640 = 20%
The project is acceptable because the company's required rate of return is 17% and the annual rate of return of the project is 20% which is much higher to that.
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