chapter 11 Capital Budgeting and Investment Analysis Compute accounting rate of
ID: 2591556 • Letter: C
Question
chapter 11 Capital Budgeting and Investment Analysis Compute accounting rate of retun and explain its use. Knowledge Check Select the best answer to each question ports Question 2 of2 eleences Chilly Company is considering investing $110,000 in a new retrigerator designed to keep food extra crispy The refnigerator well have a useful life of 10 years, a salvage value of $10.000, and s expected to generate an annual after tax net income of $15 000 in each year of its useful ife Chilly wit use the straight line method of depreciaton What is the accounting rate of return? 30% 13.64% 16.67% 25% submit answer & continue Side 4Explanation / Answer
Answer for Image 1:
Cost of Refrigerator = $110,000
Salvage Value = $10,000
Average Investment = (Cost of Refrigerator + Salvage Value) / 2
Average Investment = ($110,000 + $10,000) / 2
Average Investment = $60,000
Accounting Rate of Return = After-tax Net Income / Average Investment
Accounting Rate of Return = $15,000 / $60,000
Accounting Rate of Return = 25%
Answer for Image 2:
Cost of Refrigerator = $110,000
Salvage Value = $10,000
Average Investment = (Cost of Refrigerator + Salvage Value) / 2
Average Investment = ($110,000 + $10,000) / 2
Average Investment = $60,000
Accounting Rate of Return = After-tax Net Income / Average Investment
Accounting Rate of Return = $15,000 / $60,000
Accounting Rate of Return = 25%
Answer for Image 3:
Cost of Refrigerator = $110,000
Salvage Value = $10,000
Average Investment = (Cost of Refrigerator + Salvage Value) / 2
Average Investment = ($110,000 + $10,000) / 2
Average Investment = $60,000
Answer for Image 4:
Cost of Machine = $20,000
Cash flows:
Year 1 = $2,000
Year 2 = $10,000
Year 3 = $5,000
Initial Cost of $17,000 is recovered in first 3 years and remaining $3,000 will recover in 4th year.
Payback Period = 3 + $3,000 / $12,000
Payback Period = 3.25 years
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