Annual Rate of Return Question U3 Company is considering three long-term capital

Question

Annual Rate of Return Question

U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows Project Bono $174,400 Project Edge $190,750 Project Clayton $218,000 Capital investment Annual net income Year 1 15,260 15,260 15,260 15,260 15,260 $76,300 19,620 18,530 17,440 13,080 9,810 $78,480 29,430 25,070 22,890 14,170 13,080 $104,640 4 Total year.) Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 15%. (Assume that cash flows occur evenly throughout the

Explanation / Answer

Accounting Rate of Return = Average Annual Net Income / Average Investment

Project Bono:

Total Annual Net Income = $76,300
Average Annual Net Income = $76,300 / 5
Average Annual Net Income = $15,260

Average Investment = $174,400 / 2
Average Investment = $87,200

Accounting Rate of Return = $15,260 / $87,200
Accounting Rate of Return = 17.50%

Project Edge:

Total Annual Net Income = $78,480
Average Annual Net Income = $78,480 / 5
Average Annual Net Income = $15,696

Average Investment = $190,750 / 2
Average Investment = $95,375

Accounting Rate of Return = $15,696 / $95,375
Accounting Rate of Return = 16.46%

Project Clayton:

Total Annual Net Income = $104,640
Average Annual Net Income = $104,640 / 5
Average Annual Net Income = $20,928

Average Investment = $218,000 / 2
Average Investment = $109,000

Accounting Rate of Return = $20,928 / $109,000
Accounting Rate of Return = 19.20%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.