Question 17 Wayne Company is considering a long-term investment project called Z

Question

Question 17 Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $121,560. It will have a useful life of 4 years and no salvage value. Annual revenues would increase by $79,200, and annual expenses (excluding depreciation) would increase by $40,600. Wayne uses the straight-line method to compute depreciation expense. The company’s required rate of return is 11%. Compute the annual rate of return. (Round answer to 0 decimal places, e.g. 15%.) Annual rate of return % Determine whether the project is acceptable? the project.

Explanation / Answer

Solution:

Annual or Accounting Rate of Return measures the annual net income of the project in % term of proposed investment.

Here, Net Income means Average Annual Net Income after Depreciation and Taxes

Since Tax rate is not given in the question. Net Income means Annual Net Income after depreciation

Net Income After depreciation = Annual Revenue - Annual Expenses - Deprecation

= $79,200 - $40,600 - ($121,560 / 4)

= $79,200 - $40,600 - $30,390

= $8,210

Annual Rate of Return = Net Income after depreciation and taxes / Proposed investment amount x 100

= $8,210 / $121,560 x 100

= 6.75%

Since the Annual Rate of Return 6.75% is lower than the company's required rate of return 11%, the project is not acceptable..

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