Wallowa Company is considering a long-term investment project called ZIP. ZIP wi
ID: 2491947 • Letter: W
Question
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $118,120. It will have a useful life of 4 years and no salvage value. Annual revenues would increase by $80,450, and annual expenses (excluding depreciation) would increase by $40,170. Wallowa uses the straight-line method to compute depreciation expense. The company’s required rate of return is 15%.
Compute the annual rate of return. (Round answer to 0 decimal places, e.g. 15%.)
Determine whether the project is acceptable?
Explanation / Answer
Annual depreciation = $118120 / 4 = $29530
Annual expenses after charging depreciation = $40170+$29530 = $69700
Increase in annual income
= Increase in annual revenue - increase in annual expense
= $80450 - $69700
= $10750
Annual Rate of Return
= Increase in annual income / average investment
= increase in annual income / ((cost + salvage value)/2)
= $10750 / (($118120+0)/2)
= 18%
As the annual rate of return is greater than the return required by the company (15%), the project should be accepted.
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