A)
Depreciation per year = $300000-$30000/3 = $90000 per year
Accrual ARR = (Average net income)/(Initial investment)
Income for three years:
1st Year = $125000 - $90000 = $35000
2nd Year = $150000 - $90000 = $60000
3rd Year = $175000 - $90000 = $85000
Average annual net income = $35000+$60000+$85000 / 3 = $60000
Computation of accrual ARR | |||
S.No. | Particulars | $ | $ |
A | Purchase price | 300000 | |
Working capital invested | 25000 | ||
Initial Investment | 325,000 | ||
B | Average net income | 60,000 | |
C | Accrual accounting rate of return ( B/A) | 0.18461538 |
Hence accrual ARR = 18.4615%
B)
Computation of NPV | ||
Year | ||
Rate of return | 10% | |
0 | Initial cash outflow | $ -3,25,000.00 |
1 | cash inflow | $ 1,25,000.00 |
2 | cash inflow | $ 1,50,000.00 |
3 | cash inflow ($175000 + $30000+ $25000) | $ 2,30,000.00 |
Net present Value | $ 77,641.55 |
Note: I have used direct excel formula to compute NPV.
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