An investment project provides cash inflows of $1,200 per year for eight years.
ID: 2651548 • Letter: A
Question
An investment project provides cash inflows of $1,200 per year for eight years. (Do not round intermediate calculations. Enter 0 if the project never pays back. Round your answers to 2 decimal places (e.g., 32.16).)
years
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $18.2 million, which will be depreciated straight-line to zero over its four-year life.
If the plant has projected net income of $1,795,000, $2,135,000, $2,014,000, and $1,316,000 over these four years, what is the project’s average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
An investment project provides cash inflows of $1,200 per year for eight years. (Do not round intermediate calculations. Enter 0 if the project never pays back. Round your answers to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Requirement 1. Project Initial cost $ 3,950.00 Annual Cash inflows $ 1,200.00 Payback period 3.29 years. (Initial cost/annual cash inflow) Requirement 2 Payback period if annual cost is $5000. Initial cost $ 5,000.00 Annual cashinflows $ 1,200.00 Payback period $ 4.17 Payback period 4.17 years Requirement 3 Payback period if annual cost is $10,600. Initial cost $ 10,600.00 Annual cashinflows $ 1,200.00 Payback period $ 8.83 Payback period 8.83 years Average Accounting Return: Total net Profit ($1,795,000+$2,135,000+$2,014,000+$1,316,000) $ 7,260,000.00 Average profit (7,260,000/4) $ 1,815,000.00 Average Rate of Return 9.97% ($1,815,000/$18,200,000x100) Average Accounting Return = 9.97%
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