Question

Overland Corporation has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

The accrual accounting rate of return on the investment is:

$150,000 $40,000 Investment required in equipment Annual cash inflows Salvage value of equipment... Life of the investment........ Required rate of return ............. $0 10 years 10%

A. 10.00%

B. 16.67%

C. 36.67%

D. 26.67%

Answer 1

Answer:

Accrual accounting rate of return                     = Annual Cash flows / Ne initial Investment (-) Salvage value                     =      $40,000 / ($150,000 (-) $0)                     =      26.67 %

Accrual accounting rate of return   = 26.67%

Option (D) is correct i.e., 26.67%