Payton and Finley Davis run a real estate brokerage firm. They have just moved i

Question

Payton and Finley Davis run a real estate brokerage firm. They have just moved into a new building and want to add some outdoor digital signage to advertise the firm’s services. The sign they are considering has two display areas that can display two different images at the same time and costs $144,750. It is expected to have a useful life of 5 years. In an effort to recoup the cost of the sign, Payton and Finley will rent one display panel to other tenants in the building for $37,000 a year. Electricity to power the sign is expected to be $1,035 per year Calculate the annual net operating income generated by the new sign. Calculate the accounting rate of return of the new sign. (Round answer to 2 decimal places, e.g. 52.75%.) If the sign is successful in generating new business for the firm, how will the accounting rate of return be affected?
If the sign is successful, accounting rate of return will

Explanation / Answer

Payton and Finley Davis Calculate the annual net operating income generated by the new sign. Rent (income) $ 37000 Electricity $ 1035 Depreciation $ 144750/5 = $ 28950. Net operating income = 37000 - 1035 - 28950 = $ 7015 Calculate the accounting rate of return of the new sign. ARR =NOI / Total cost of sign ARR = 7015 / 144750 = 0.04846 or 4.85%

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