Payback Period and Accounting Rate of Return: Equal Annual Operating Cash Flows

Question

Payback Period and Accounting Rate of Return: Equal Annual Operating Cash Flows without Disinvestment
Juliana is considering an investment proposal with the following cash flows:

For parts b. and c., round answers to three decimal places, if applicable.

a. Determine the payback period.

Answer years

b. Determine the accounting rate of return on initial investment.

Answer

c. Determine the accounting rate of return on average investment.

Answer

Initial investment-depreciable assets $49,000 Net cash inflows from operations (per year for 10 years) 7,000 Disinvestment 0

Explanation / Answer

a. Payback Period = Cost of the investment / Annual net cash flow = $ 49,000 / $ 7,000 = 7 years

b. Accounting rate of return on initial investment = (Average revenues - Average expenses) / Initial investment

Average expenses = Annual straight line depreciation = $49,000 / 10 years = $ 4,900

Accounting rate of return = ($7,000 - $4,900) / $ 49,000 = 4.286 %

c. Accounting rate of return on average investment:

Average investment = ($49,000 + $0) / 2 = $ 24,500

Accounting rate of return = ($7,000 - $4,900) / $ 24,500 = 8.571 %

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