Question

Accounting Rate of Return Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Cobre Company is considering the purchase of new equipment that will speed up the process for extracting copper. The equipment will cost $3,600,000 and have a life of 5 years with no expected salvage value. The expected cash flows associated with the project are as follows: Cash Cash Year Revenues Expenses $5,000,000 $4,800,000 6,000,000 4,800,000 6,000,000 4,800,000 6,000,000 4,800,000 6,00a Da 4,800, DDD b. Emily Hansen is considering investing in one of the following two projects, Either project will require an investment of $75,000. The expected cash revenues minus cash expenses for the two projects follow. Assume each project is depreciable. Project Project Year 1 $22,500 $22,500 2 30,000 30,000 45,000 45,000 4 75,000 22,500 5 75,000 22,500 C. Suppose that a project has an ARR of 30% (based on initial investment) and that the average net income of the project is $120,000. d. Suppose that a project has an ARR of 50% and that the investment is $150,000. Required: 1. Compute the ARR on the new equipment that Cobre Company is considering. Round your answer to one decimal place. 13.3 % 2. Conceptual Connection: Which project should Emily Hansen choose based on the ARR? Notice that the payback period is the same for both Investments (thus equally preferred). Unlike the payback period, explain why ARR correctly signals that one praject should be preferred over the other ARR Project A Project B 18 % Based on the ARR, Emily Hansen chosen Project AV- 3. How much did the company in Scenario c invest in the project? SIX 4. What is the average net income earned by the project in Scenario d? $ 75,00

Answer 1

Requirement 1 , 2 & 4 are already correctly answered as shown in image provided.

Requirement 3:

ARR is 30%

Average net income of project is $120,000

Amount of investment is to be calculated

ARR = Average Net Income / Average Investment

here ARR is 30%

plotting values in formula,

30% = $120,000 / Average investment

Average investment= $ 120,000 / 30%

= $ 400,000

therefore average investment is $ 400,000 if ARR is 30% and net income is $ 120,000

Company in scenario C invests $ 400,000 in the project