Payback period and accounting rate of return: Equal annual operating cash flows

Question

Payback period and accounting rate of return: Equal annual operating cash flows with disinvestment

Khazanchi in considering an investment proposal with the following cash flows

A) Determine the payback period

B) Determine the accounting rate of return on initial investment

C) Determine the accounting rate of return on average investment

Initial investment-depreciable assets $100,000 Initil investments-working capital 12,500 Net cash inflows from operations (per year for 8 years) 25,000 Disinvestment-depreciable assets 10,000 Disinvestment-working capital 12,500

Explanation / Answer

Answer:A) Payback period=100000/25000=4 years

Answer:B) ARR=(25000/100000)*100=25%

Answer:C) ARR=(25000/112500)*100=22.22%

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