Question

question 8

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A company is evaluating three possible investments. Each uses the straight – line method of depreciation. The following information is provided by the company: Project A Project B Project C Investment $226,000 $50,000 $226,000 Residual value 0 20,000 36,000 Net cash inflows: Year 1 66,000 28,000 94,000 Year 2 66,000 19,000 64,000 Year 3 66,000 15,000 74,000 Year 4 66,000 12,000 34,000 Year 5 66,000 0 0 What is the accounting rate of return for Proiect C? (Round vour answer to two decimal places.) O A. 13.27% OB. 14.50% O C. 15.04% D. 24.00% Was

Answer 1

Answer :

Option - B, 14.50%

Explanation :

Calculation of Accounting rate of return of Project C :

Total Depreciation charged during life of project

= $226,000 - $36,000

= $190,000

Total inflow during life = $94,000 + $64,000 + $74,000 + $34,000

= $266,000

Average Annual profit

= (Total inflow during life - Total Depreciation charged during life of project) / 4 years

= ($266,000 - $190,000) / 4 years

= $19,000

Average Investment

= ($226,000 + $36,000) / 2

= $131,000

Accounting rate of return = Average Annual profit / Average Investment

= $19,000 / $131,000

= 14.50%