A company is evaluating three possible investments. Each uses the straight - lin

Question

A company is evaluating three possible investments. Each uses the straight - line method of depreciation. The following information is provided by the company: Project A Project B Project C $202,000 $50,000 $202,000 22,000 Investment Residual value Net cash inflows: Year 1 Year 2 Year 3 Year 4 Year 5 12,000 70,000 70,000 70,000 70,000 70,000 36,000 27,000 23,000 20,000 0 84,000 54,000 64,000 24,000 What is the accounting rate of return for Project C? (Round your answer to two decimal places.) OA. OB. 10.27% 14.85% 11.88% 40.00% OC. OD,

Explanation / Answer

Rate of Return = (Average Returns / Investment)*100

Average Returns = Avreage net cash flows + Depreciation + Average Salvage Value

= (($84000+$54000+$64000+$24000)/5) + (($202000-$22000)/5) + ($22000 / 5)

= $45200 + $36000 + $4400

= $85600

Rate of Return of C = (($85600 / $202000) * 100) / 3

= 42.376 / 3

= 14.125

This Rate Nearest Rate is 14.85%

The Rate of Return is 14.85%

The answer is 'B'.

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