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12-5 Wayne Company is considering a long-term investment project called ZIP. ZIP

ID: 2500154 • Letter: 1

Question

12-5

Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $117,280. it will have a useful life of 4 years and no salvage value. Annual revenues would increase by $80,200, and annual expenses (excluding depreciation) would increase by $39,200. Wayne uses the straight-line method to compute depreciation expenses. The company's required rate of return is 17%. 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

Increase in Revenue = $ 80200

Less: increase in expenses = $ 39200

Less:Depreciation (117280/4) = $29320

Annual net income = $11680

Average Investment = ($117,280 + 0) / 2 = $58640

Annual rate of return = $11,680 / $58,640 = 20%

The project is acceptable because the company's required rate of return is 17% and the annual rate of return of the project is 20% which is much higher to that.