Natt Ltd is considering undertaking a project that would yield profits (after depreciation) of $545,000 after 2 years. The initial outlay of the project would be $800,000 and the project's assets would have a residual value of $50,000 at the end of the project. What would be the accounting rate of return for this project?

Natt Ltd is considering undertaking a project that would yield profits (after depreciation) of $545,000 after 2 years. The initial outlay of the project would be $800,000 and the project's assets would have a residual value of $50,000 at the end of the project. What would be the accounting rate of return for this project?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 2PA: Jasmine Manufacturing is considering a project that will require an initial investment of $52,000...

See similar textbooks

Similar questions

A project is projected to have the following net income: Year 1 = $80,000; Year 2 = $40,000; Year 3 = –$30,000. The same project has an initial investment of $300,000 and will lose value at a rate of $100,000 per year. The numerator in the average accounting return method will be?
Consider a project with free cash flows in one year of $106,89 or $112,37, with each outcome being equally likely. The initial investment required for the project is $60,35, and the project's cost of capital is 0,20%. What is the NPV of this project?
ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NP of the assembler if the required rate of return is 12%. Show calculation. Would you accept/reject a project based on NPV decision criteria? Why? Based on NPV calculated in part A, determine Profitability Index (PI). Show calculation. Would you accept/reject a project based on PI decision criteria? Why?
Garfield Inc is considering a new project that requires an initial investment of $37,700 and will generate a net income of $5,331 per year, if the project’s profitability index is 1.8, What is the present value of the project’s future cash flows. Round to the nearest dollar.
Consider a project with free cash flow in one year of $139,138 or $187,005, with either outcome being equally likely. The initial investment required for the project is $110,000, and the project's cost of capital is 23%. The risk-free interest rate is 7%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way that is, what is the initial market value of the unlevered equity? c. Suppose the initial $110,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity, and what is its initial value according to M&M? a. What is the NPV of this project? The NPV is $ 22578. (Round to the nearest dollar.) b. Suppose that to raise the funds for the initial investment, the project is sold to…
XYZ is considering a 3-yr project. The initial outlay is -$120,000, annual cash flow is $50,000 and the terminal cash flow is $10,000. The required rate of return (cost of capital) is 15%. The net present value is $736.42. What if the annual cash flow increases to $51,000 instead? Re-calculate the NPV.
The property is current selling for $400,000. You have forecasted, at the end of the fifth year we will assume the property will (or at least could) be sold for $500,000. If the required rate of return on projects of similar risk is 15%. ⦁ What is the net present value (NPV) of this investment project and should it be purchased? ⦁ What is the Internal Rate of Return offered by the project?
Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. the initial outlay would be $11,700,000, and the project would generate cash flows of $1,200,000 per year for 20 years. the appropriate discount rate is 6.7%. A. Calculate the NPV b. Calculate the PI C. Calculate the IRR D. should this project be accepted? why or why not?
Ariake Inc. is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The initial outlay would be $1,850,000, and the project would generate incremental free cash flows of $400,000 per year for 7 years. The appropriate required rate of return is 8 percent. a. Calculate the NPV b. Calculate the PI c. Calculate the IRR d. Should the project be accepted? Why? (*You must show your calculation process as well.)
Cute Camel Lumber Company is considering a three-year project that has a weighted average cost of capital of 10% and a net present value (NPV) of $85,647. Cute Camel Lumber Company can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? Do the projects need to be independent or mutually exlusive for an analyst to use the EAA approach to evaluate projects with unequal lives?
Consider a project with an initial investment (today, t = 0) of $200,975. This project will generate cash flows of $49,500 per year for the next 8 years, at which time (end of Year 8) the company will pay $50,000 to another for clean-up and disposal. What is the Profitability Index (PI) of the project if shareholders demand a 16.295% return? Answer with a number rounded to three decimal places, e.g., 4.0877% should be entered as 4.088.
Yokam Company is considering two alternative projects. Project 1 requires an initial investment of $420,000 and has a present value of all its cash flows of $1,350,000. Project 2 requires an initial investment of $5 million and has a present value of all its cash flows of $6 million. (a) Compute the profitability index for each project.(b) Based on the profitability index, which project should the company select?