Bartlett Car Wash Co. is considering the purchase of a new facility. It would al

Question

Bartlett Car Wash Co. is considering the purchase of a new facility. It would allow Bartlett to increase its net income by $104,082 per year. Other information about this proposed project follows: nitial investment Useful life $473,100 9 years Salvage value $ 51,000 Assume straight line depreciation method is used Required: 1. Calculate the accounting rate of return for Bartlett. (Round your percentage answer to 2 decimal places.) Accounting Rate of Return 2. Calculate the payback period for Bartlett. (Round your answer to 2 decimal places.) Payback Period years

Explanation / Answer

Accounting rate of return, also known as the Average rate of return, or ARR is a financial ratio used in capital budgeting. The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return.

Initial Investment = 473,100

Usefull life = 9 years

Salvage Value = 51,000

Increase in Net Income p.a. = 104,082

Annual Depreciation = (Initial Investment Scrap Value) ÷ Useful Life in Years
Annual Depreciation = ($473,100 $51,000) ÷ 9 = $46,900
Average Accounting Income = $104,082 $46,900 = $57,182
Accounting Rate of Return = $57,182 ÷ $473,100 = 12.09%

The payback period is the length of time required to recover the cost of an investment.

Payback Period = 473,100 / 57,182 = 8.27 years

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