A company is evaluating three possible investments. Each uses the straight-line

Question

A company is evaluating three possible investments. Each uses the straight-line method of depreciation. The following information in Project A Project B Project C $212,000 $50,000 $212,000 0 24,000 36,000 Investment Residual value Net cash inflows Year 1 Year 2 Year 3 Year 4 Year 5 What is the accounting rate of return for Project C? (Round your answer to two decimal places.) 50,000 26,000 100,000 0,000 17,000 70,000 50,000 13,000 80,000 50,000 10,00040,000 50,000 OA. 22.98% O B. 18.87% 20.00% C- OD. 14.15%

Explanation / Answer

Total annual cashflow = 290000

Depreciation = (212000-36000/4)*4 = 176000

Average annual return = (290000-176000/4) = 28500

Average investment = 212000+36000/2 = 124000

Accounting rate of return = 28500*100/124000 = 22.98%

so answer is a) 22.98%

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