TOM’s Tomatoes and Herbs, LLC is considering investing in two alternative projec
ID: 2561177 • Letter: T
Question
TOM’s Tomatoes and Herbs, LLC is considering investing in two alternative projects to improve the processing and packaging of TOM’s Old World Spaghetti Sauce. Investment A has a lifespan of 8 years and initial costs of $20,000. Investment B has a lifespan of 5 years and initial costs of $10,000. TOM’s Tomatoes and Herbs, LLC assumes a 10% discount rate on potential investments.
The yearly after-tax benefits for investment A are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
$2,000
$3,000
$4,000
$5,000
$6,000
$5,000
$4,500
$3,500
The yearly after-tax benefits for investment B are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
$3,000
$3,000
$3,000
$3,000
$3,000
Assuming straight line depreciation of the two investments and a salvage value of $1,000 for Investment A and $500 for Investment B, what are the Average Annual Rates of Return of each investment? Round to the nearest dollar or tenth for the percentage.
After-tax Benefits
Value of Investment A
Average Annual Rate of Return for Investment A: %
After-tax Benefits
Value of Investment B
Average Annual Rate of Return for Investment B: %
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
$2,000
$3,000
$4,000
$5,000
$6,000
$5,000
$4,500
$3,500
Explanation / Answer
Year Investment A 1 2 3 4 5 6 7 8 Average After-tax Benefits $2000 $3000 $4000 $5000 $6000 $5000 $4500 $3500 $4125 Value of Investment A 01-Jan 20000 22000 25000 29000 34000 40000 45000 49500 33062.5 31-Dec 22000 25000 29000 34000 40000 45000 49500 54000 37312.5 Average 10% 13.64% 16% 17.24% 17.65% 12.50% 10% 9.09% 13.27% Average Annual Rate of Return for Investment A: % 13.27% Year Investment B 1 2 3 4 5 Average After-tax Benefits $3000 $3000 $3000 $3000 $3000 $3000 Value of Investment B 01-Jan 10000 13000 16000 19000 22000 80000 31-Dec 13000 16000 19000 22000 25000 95000 Average 30% 23.08% 18.75% 15.79% 13.64% 20.25% Average Annual Rate of Return for Investment B: % 20.25%
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