Question

Hansen Movers is considering investing in 2 new trucks for their residential moving business. The investment will require an outlay of $210,000 initially, and is expected to generate the following pre-tax cash flows:

Year 1	$ 50,000
Year 2	$ 60,000
Year 3	$ 30,000 (due to planned repairs)
Year 4	$ 50,000
Year 5	$ 45,000

The trucks would be fully depreciated on a straight-line basis over the course of 5 years, with a full year of depreciation taken in the first year. Even though they will be fully depreciated, the company expects to be able to sell the trucks for $20,000. The company uses a discount rate of 9%, and pays a marginal tax rate of 25%.

What is the Average Rate of Return of this proposed investment? (Round to 2 decimal places)

Select one or more:

a. 8.05%

b. 9.00%

c. 45.2%

d. 11.90%

e. 6.43%

Answer 1

The question has been solved in the following image

STATEMENT SHOWING CALCULATION OF ANNUAL PROFITS YEAR1 ($) YEAR 2($) YEAR 3($) YEAR 4($) YEAR 5($) PARTICULARS 50000 30000 50000 45000 PRE TAX CASH FLOWS 60000 ADD: GAIN ON SALE OF TRUCKS 0 0 0 0 0 -42000 -42000 LESS: DEPRECIATION 42000 -42000 -42000 -12000 3000 PROFIT AFTER DEPRECATION 8000 18000 8000 Less: tax@25% 2000 -3000 2000 750 4500 PROFIT AFTER TAX 6000 2250 13500 -9000 6000 CALCULATION PF AVERAGE RATE OF RETURNS TOTAL PROFIT IN 5 YEARS 18750 210000 INITIALINVESTMENT HENCE ARR- 18 750/210000 9% NOTE S: 1. Avereage rate of return ignores time value of money, hence disconting rate has been ignored 2. Assumed that cash flow of $45000 for year 5 is inclusive of sale valuefrom trucks i.e. $20000