Gibson Hardware is adding a new product line that will require an investment of

Question

Gibson Hardware is adding a new product line that will require an investment of $1,530,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $305,000 the first year, $270,000 the second year, and $255,000 each year thereafter for eight years. The investment has no residual value. Compute the ARR for the investment. First, enter the formula, then compute the ARR of the new product line. (Enter your answer as a percent rounded to two decimal places.) Accounting Average annual operating income from asset I nitial investment s rate of return 1,530,000

Explanation / Answer

Average Annual Operating Income from asset = ($305000+270000+8*255000)/10 = $261500

Accounting rate of return = 261500/1530000 = 17.09%

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