You want to get approval for a capital expense to bring the copy service back in
ID: 2576088 • Letter: Y
Question
You want to get approval for a capital expense to bring the copy service back in house. You estimate that it will bring in a net cash flow of $40,000 over the next 5 years. An initial outlay of $24,000.00 cash will be needed for 2 networked, dedicated computers and a new copy machine to support the ROI staff you already have.
Use straight-line depreciation in calculating the average net income and enter the information in Table6-31. The accounting rate of return needs to be at least 10% for the project to be accepted.
Will the accounting rate of return for the capital expense be acceptable?
Accounting Rate of Return Method of Evaluating Capital Expense
Accounting Rate of Return
Net Cash flow per year
Cash flow/number of years
40, 000/5= 8000
Depreciation
Cost/ number of years
Average net income
Net cash flow per year less
Depreciation
Investment
Cost of project
Accounting rate of return for project
Average net income/investment
Accounting Rate of Return
Net Cash flow per year
Cash flow/number of years
40, 000/5= 8000
Depreciation
Cost/ number of years
Average net income
Net cash flow per year less
Depreciation
Investment
Cost of project
Accounting rate of return for project
Average net income/investment
Explanation / Answer
Accounting Rate of Return Net Cash flow per year Cash flow/number of years 40, 000/5= 8000 Depreciation Cost/ number of years 24000/5Year=4800 Average net income Net cash flow per year less 8000-4800=3200 Depreciation Investment Cost of project 24000 Accounting rate of return for project Average net income/investment 3200/24000%=13.33 The answer is yes, because Accounting rate of return is 13.33% which is higher than expected Accounting rate of return (10%) for the project
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