Question

Caruso Hardware is adding a new product line that will require an investment of 51 500 000. Managers estimate that this investment will have a 10-year lite and generate net cash inflows of $335 000 the first year 5275 000 the second year and $255 000 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 producine Enter your answer as a percent rounded to decimal places) Average annual operating income from asset initial investment Accounting rate of retur

Answer 1

Year Annual Cash Inflow 1 $ 3,35,000 2 $ 2,75,000 3 $ 2,55,000 4 $ 2,55,000 5 $ 2,55,000 6 $ 2,55,000 7 $ 2,55,000 8 $ 2,55,000 9 $ 2,55,000 10 $ 2,55,000 $ 26,50,000 Average Cash Inflow = $2650000 / 10 years = $ 2,65,000 Depreciation = (Initial Investment - Salvage Value) / life = ($1,500,000 - 0) / 10 = $ 1,50,000 per year Average Operating Income from asset = Average Cash Inflow - Depreciation = $ 265000 - $ 150000 = $ 1,15,000 Initial Investment = $ 15,00,000 Accounting Rate of Return X100 = Average Operating Income from asset Initial Investment = $ 1,15,000 X100 $ 15,00,000 7.67%