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usinesscourse.com/platform/mod/quiz/attempt.php?attempt-18117688page-1 E Menu QUESTION 2 Not complete Points out of 15.00 Flag question Payback Period and Accounting Rate of Return: Equal Annual Operating Cash Flows with Disinvestment Roopali is considering an investment proposal with the following cash flows: Initial investment-depreciable assets Initial investment-working capital Net cash inflows from operations (per year for 7 years) 10,000 Disinvestment-depreciable assets Disinvestment-working capital $45,000 5,000 3,000 2,000 For parts b. and c., round answers to three decimal places if applicable. a. Determine the payback period. o years b. Determine the accounting rate of return on initial investment c. Determine the accounting rate of return on average investment Check Save Annswers Previous page Next page

Explanation / Answer

Solution a:

Initial investment = $45,000 +$5,000 = $50,000

Annual cash inflows = $10,000

Payback period = Initial investment / Annual cash inflows = $50,000 / $10,000 = 5 Years

Solution b:

Annual depreciation = ($45,000 - $3,000) / 7 = $6,000

Average annual income = Net cash flow from operation - Depreciation = $10,000 - $6,000 = $4,000

Accounting rate of return on initital investment = $4,000 / $50,000 = 8%

Solution c:

Average investment = (Initital investment +Salvage Value) / 2 = ($50,000 + $3,000 + $2,000) / 2 = $27,500

Accounting rate of return on average investment = Average annual income / Average investment = $4,000 / $27,500 = 14.545%

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