6.00 points Bartlett Car Wash Co. is considering the purchase of a new facility.

Question

6.00 points Bartlett Car Wash Co. is considering the purchase of a new facility. It would allow Bartlett to increase its net income by $75,541 per year. Other information about this proposed project follows Initial investment Useful lide $372.125 7 years Salvage value 44,000 Assume straight line depreciation method is used Required: 1. Calculate the accounting rate of return for Bartett. (Round your percentage answer to 2 decimal places.) Spea 217-8 2. Calculate the payback period for Bartlett. (Round your answer to 2 decimal places)

Explanation / Answer

1)   Accountig rate of return = 36.31% or, 20.30% Working: Average accounting Income = $ 75,541.00 Average Investment = (372125+44000)/2 = $ 2,08,062.50 Accountig rate of return = Average accounting Income / Average Investment = $ 75,541.00 / $ 2,08,062.50 = 36.31% Some times Initial Investment only is considered instead of Average Investment. In Such Case, Accountig rate of return = Average accounting Income / Initial Investment = $ 75,541.00 / $ 3,72,125.00 = 20.30% 2) Payback Period 3.04 Years Working: Payback period is the time upto which initial investment is recovered back. i. Straight Line Depreciation expenses = (Cost-Salvage )/Estimated Useful Life = (372125-44000)/7 = $ 46,875.00 ii. Annual Net Income $     75,541.00 Add:Straight Line Depreciation $     46,875.00 Annual Cash flow $ 1,22,416.00 iii. Payback Period = Initial Investment /Annual Cash flow = $ 3,72,125.00 / $ 1,22,416.00 = 3.04 Years

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