Question

Robinson Hardware is adding a new product line that will require an investment of $1,530,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $310,000 the first year, $275,000 the second year, and $240,000 each year thereafter for eight years. The investment has no residual value. Compute the ARR for the investment. First, enter the formula, then compute the ARR of the new product line. (Enter your answer as a percent rounded to two decimal places.) Accounting rate of return Average annual operating income from asset Initial investment =

Answer 1

>> Average Net Cash flows = ( $ 310,000 + $ 275,000 + ( 240,000 * 8 ) ) / 10

>> Average Net Cash flows = $ 250,500.

>> Annual Depreciation = ( 1,530,000 / 10 )

>> Annual Depreciation = $ 153,000.

>> Average Net Income = $ 250,500 - $ 153,000

>> Average Net Income = $ 97,500.

>> Initial investment = $ 1,530,000

>> Accounting Rate of Return = Average net income / Initial investment

>> Accounting Rate of Return = ( $ 97,500 * 100 ) / $ 1,530,000

>> Accounting Rate of Return = 6.37 %