Question

Payback period and Accounting Rate of Return: Equal Annual Operating Cash Flows without Disinvestment Juliana is considering an investment proposal with the following cash flows: Initial investment-depreciable assets $49,000 Net cash inflows from operations (per year for 10 years) 7,000 Disinvestment For parts b. and C., round answers to three decimal places, if applicable. a. Determine the payback period. 7 years b. Determine the accounting rate of return on initial investment. c. Determine the accounting rate of return on average investment.

Answer 1

Payback Period		in $
Initial Investment depreciable assets	A	49,000
Net Cash flow from operations per year	B	7,000
Payback Period	A/B	7
Accounting Rate of Return on Initial Investments		in $
Initial Investment depreciable assets	A	49,000
Net Cash flow from operations per year	B	7,000
Accounting Rate of Return on Initial Investments	B/A*100	14%
Accounting Rate of Return on Average investment		in $
Net Cash flow from operations	A	7,000
for 10 years	B	70,000
Less Depreciation	C	44,000
Average Annual Profit	D=(B-C)/10	2,600
Initial Investment depreciable assets	E	49,000
Scrap value of the Asset	F	5,000
Average Investment	G=(E+F)/2	27,000
Accounting Rate of Return on Average investment	D/G*10	10%
Note :Assumed scrap value as $5,000, so depreciation is taken as $44,000 over 10 years