M12-19. Payback Period and Accounting Rate of Return: Equal Annual Operating Cas
ID: 2560819 • Letter: M
Question
M12-19. Payback Period and Accounting Rate of Return: Equal Annual Operating Cash Flows with Disinvestment Roopali is considering an investment proposal with the following cash flows: Initial investment—depreciable assets. ....... Initial investment—working capital. ....... Net cash inflows from operations (per year for 7 years). ..... Disinvestment—depreciable assets. .. Disinvestment—working capital. ..... $45,000 5,000 10,000 3,000 2,000 Required a. Determine the payback period b. Determine the accounting rate of return on initial investment c. Determine the accounting rate of return on average investmentExplanation / Answer
a) Payback Period = Total Initial Investment/Annual net cash inflows
= (Investment depreciable assets+Working capital)/Annual net cash inflows
= ($45,000+$5,000)/$10,000 = $50,000/$10,000 = 5 years
b) Accounting rate of return on initial investment = (Annual net profit/Total Initial Investment)*100
Annual Net Profit = Cash Inflows - Depreciation per annum
Depreciation = (Investment in depreciable assets - Disinvestment depreciable assets)/useful life
Depreciation = ($45,000-$3,000)/7 years = $42,000/7 yrs = $6,000 per annum
Annual Net profit = $10,000 - $6,000 = $4,000
Accounting rate of return = ($4,000/$50,000)*100 = 8%
c) Accounting rate of return on average investment = (Annual net profit/Average Investment)*100
Average Investment = (Total Investment + Total Disinvestment)/2
Average Investment = ($45,000+$5,000+$3,000+$2,000)/2 = $27,500
Annual net profit = $4,000
Accounting rate of return = ($4,000/$27,500) = 14.55%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.