Question

Payback Period and Accounting Rate of Return: Equal Annual Operating Cash Flows with Disinvestment
Minn is considering an investment proposal with the following cash flows:

Initial investment-depreciable assets	$75,000
Net cash inflows from operations (per year for 10 years)	15,000
Disinvestment-depreciable assets	8,000

For parts b. and c., round answers to three decimal places, if applicable.

a. Determine the payback period.
    _____ years

b. Determine the accounting rate of return on initial investment.

c. Determine the accounting rate of return on average investment.

Answer 1

Information Given -

Initial investment - Depreciable assets = $75000.

Net cash inflows from operations (per year for 10 years) = $15000.

Disinvestment - Depreciable assets = $8000.

.

(a) -- Determine the Payback Period.

Answer -

	Calculations
Payback Period	= Initial investment / Net annual cash inflows = $75000 / $15000 = 5 Years.

.

(b) -- Determine the Accounting rate of return on Initial Investment.

Answer -

	Calculations
Accounting rate of return on Initial Investment	= Average annual profit / Initial Investment = $15000 / $75000 = 20%

.

(c) -- Determine the Accounting rate of return on Average Investment.

Answer -

	Calculations
Accounting rate of return on Average Investment	= Average annual profit / Average Investment = $15000 / [($75000 + $8000) / 2] = 36.145%