The Silverside Company is considering investing in two alternative projects Proi

Question

The Silverside Company is considering investing in two alternative projects Proiect1 $500,000 Project 2 $240,000 Investment Useful life (years) Estimated annual net cash inflows for useful life Residual value Depreciation method Required rate of return $70,000 $32,000 $65,000 $10,000 Straight-line Straight-line 5% 9% What is the accounting rate of return for Project 2? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.) OA. 27.08% B. 4.17% OC. 13.39% D. 33.33%

Explanation / Answer

Project 2:

Depreciation = (Investment – Residual value) / Useful life years

                        = ($240,000 - $10,000) / 7

                        = $32,857

Annual profit = Net cash inflows – Depreciation

                        = $65,000 - $32,857

                        = $32,143

Accounting rate of return = (Annual profit / Investment) × 100

                                          = ($32,143 / $240,000) × 100

                                          = 13.39%

Answer: C

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