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

Question

Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual revenues would increase by $80,000, and annual expenses (excluding depreciation) would increase by $41,000. Wayne uses the straight-line method to compute depreciation expense. The company’s required rate of return is 12%.

Compute the annual rate of return. (Round answer to 0 decimal places, e.g. 15%.)

Determine whether the project is acceptable?

Explanation / Answer

Since required rate of return is more than the project return therefore project is not acceptable.

Particulars Amt Revenue 80000 Less: Expenses 41000 Less: Depreciation
(120000/4) 30000 Increase in Income (A) 9000 Investment (B) 120000 Annual Rate of Return (A/B) 8%

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