A firm is considering a project with an initial cash outlay of AED 250,000 and n
ID: 2733282 • Letter: A
Question
A firm is considering a project with an initial cash outlay of AED 250,000 and no residual value. The project is expected to provide incremental net income (revenues - expenses) over the next five years of the following amounts: (all amounts in AED)
Year 1
12,000
Year 2
18,000
Year 3
26,000
Year 4
24,000
Year 5
20,000
TOTAL
100,000
Calculate its accounting rate of return assuming that there are no other expenses on the project.
Year 1
12,000
Year 2
18,000
Year 3
26,000
Year 4
24,000
Year 5
20,000
TOTAL
100,000
Calculate its accounting rate of return assuming that there are no other expenses on the project.
Year 1
12,000
Year 2
18,000
Year 3
26,000
Year 4
24,000
Year 5
20,000
TOTAL
100,000
Explanation / Answer
AverageIncremental Income = ( 12000 +18000 +26000 +24000+ 20000)/ 5 =AED 20000
Average Investmen = ( 250000 + 0)/2 = AED 125000
AAR = 20000/125000 = 16%
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