A company is evaluating three possible investments. Each usesthe straight - line method of depreciation. The followinginformation is provided by the company:
Investment: $212,000
Salvage Value: $30,000
Net Cash Flows
Year 1: $86,000
Year 2: $56,000
Year 3: $66,000
Year 4: $26,000
Year 5: $0
What is the accounting rate of return?
A) 14.15%
B) 12.26%
C) 10.74%
D) 26.92%
________________
This is how I did it:
Total Net Cash Inflows 234,000 Less: Total Depreciation (212,000-30,000) 182,000 Total Operating Income During Operating Life 52,000 Divide By Assets Operating Life in Years 4 Average Annual Operating Income 13,000
I wasnt sure if I should divide by 4 or 5, but dividingby 4 got me an answer provided. Is that the right number touse?
Average Amount Invested = (Amount Invested + ResidualValue)/2
= (212,000 + 30,000)/2 = 121,000
I used my salvage value as my residual value.
Finally, to get ARR:
= Average Annual Operating Income / Average Amount Invested
=13,000 / 121,000 = .1074380165 = 10.74%
Is that the right way or am I doing it inccorrectly?
A company is evaluating three possible investments. Each usesthe straight - line method of depreciation. The followinginformation is provided by the company:
Investment: $212,000
Salvage Value: $30,000
Net Cash Flows
Year 1: $86,000
Year 2: $56,000
Year 3: $66,000
Year 4: $26,000
Year 5: $0
What is the accounting rate of return?
A) 14.15%
B) 12.26%
C) 10.74%
D) 26.92%
________________
This is how I did it:
| Total Net Cash Inflows | 234,000 |
| Less: Total Depreciation (212,000-30,000) | 182,000 |
| Total Operating Income During Operating Life | 52,000 |
| Divide By Assets Operating Life in Years | 4 |
| Average Annual Operating Income | 13,000 |
I wasnt sure if I should divide by 4 or 5, but dividingby 4 got me an answer provided. Is that the right number touse?
Average Amount Invested = (Amount Invested + ResidualValue)/2
= (212,000 + 30,000)/2 = 121,000
I used my salvage value as my residual value.
Finally, to get ARR:
= Average Annual Operating Income / Average Amount Invested
=13,000 / 121,000 = .1074380165 = 10.74%
Is that the right way or am I doing it inccorrectly?
Related questions
I have tried multiple times to figure out parts a and c. pleasehelp if possible and at the end there are helpful hints
| Average Rate of Return, Cash Payback Period, Net Present ValueMethod Great Plains Transportation Inc. is considering acquiringequipment at a cost of $296,000. The equipment has an estimatedlife of 10 years and no residual value. It is expected to provideyearly net cash flows of $37,000. The company's minimum desiredrate of return for net present value analysis is 15%.
Compute the following: a. The average rate of return, giving effect tostraight-line depreciation on the investment. If required, roundyour answer to one decimal place. c. The net present value. Use the above tableof the present value of an annuity of $1. Round to the nearestdollar. If required, use a minus sign to indicate negative netpresent value" for current grading purpose.
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a. Divide the estimated average annual income by the averageinvestment. Net cash flow less the annual depreciation expenseequals average annual income. Investment cost divided by two equalsaverage investment.
b. Divide the amount to be invested by the annual net cashflow.
c. Subtract the cost from the present value of the annual netcash flow. (Use the present value of an annuity factor for 10periods at 15%, Exhibit 2.)
Learning Objective 2, Learning Objective 3.
| Rockyford Company must replace some machinery that has zero book value and a current market value of $1,600. One possibility is to invest in new machinery costing $41,000. This new machinery would produce estimated annual pretax cash operating savings of $16,400. Assume the new machine will have a useful life of four years and depreciation of $10,250 each year for book and tax purposes. It will have no salvage value at the end of four years. The investment in this new machinery would require an additional $2,300 investment of net working capital. (Assume that when the old machine was purchased the incremental net working capital required at the time was $0.) |
| If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment will occur during the next four calendar years. |
| Rockyford is subject to a 40% income-tax rate for all ordinary income and capital gains and has a 11% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix CâTable 1 or Table 2.) |
| Required: |
| 1. | Determine the after-tax cash flow arising from disposing of the old machinery. |
| 2. | Determine the present value of the after-tax cash flows for the next four years attributable to the cash operating savings. (Round your answer to the nearest whole dollar amount.) |
| 3. | Determine the present value of the tax shield effect of depreciation for year 1. (Round your answer to the nearest whole dollar amount.) |
| 4. | Which one of the following is the proper treatment for the additional $2,300 of net working capital required in the current year? | ||||||||||
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