Question

^{Payback period and Accounting Rate of Return: Equal Annual Operating Cash Flows with Disinvestment Roopali is considering an investment proposal with the following cash flows: Initial investment-depreciable assets $125,000 Initial investment-working capital 19,000 Net cash inflows from operations (per year for 12 years) 18,000 Disinvestment-depreciable assets 14,000 Disinvestment-working capital 2,000 For parts b. and C., round answers to three decimal places, if applicable. a. Determine the payback period. 8 years b. Determine the accounting rate of return on initial investment 6.076 x c. Determine the accounting rate of return on average investment 10.937 x}

Answer 1

Accounting rate of return on initial investment.

Average accounting income = Annual cash flow - Depreciation

                                                   = 18,000 – 14000

                                                   = 4,000

ARR = Average accounting income/ initial investment *100         

        = 4,000/125,000*100

        = 3.20%

Accounting rate of return on average investment

Average investment = Initial investment +scrap value +working capital/2

                                  =125000+14000+19000/2

                                  = 79,000

ARR = Average accounting income/ average investment *100     

        = 4,000/79,000*100

        = 5.06%