Each of the following parts is independent. Assume all cash flows are after-tax cash flows.
1. Cameron Company is considering the purchase of new equipment that will speed up the process for extracting copper. The equipment will cost $1,500,000 and have a life of five years with no expected salvage value. The expected cash flows associated with the project follow:
Year
|
Cash Revenues
|
Cash Expenses
|
|
1
|
$2,500,000
|
$2,000,000
|
|
2
|
2,500,000
|
2,000,000
|
|
3
|
2,500,000
|
2,000,000
|
|
4
|
2,500,000
|
2,000,000
|
|
5
|
2,500,000
|
2,000,000
|
Compute the equipment's accounting rate of return.
2. Merlene Jensen is considering investing in one of the following two projects. Either project will require an investment of $20,000. The expected revenues less cash expenses for the two projects follow. Assume each project is depreciable.
| Year |
Project A |
Project B |
|
1
|
$ 6,000
|
$6,000
|
|
2
|
8,000
|
8,000
|
|
3
|
10,000
|
12,000
|
|
4
|
20,000
|
6,000
|
|
5
|
20,000
|
6,000
|
Which project should be chosen based on the accounting rate of return?
3. Suppose that a project has an accounting rate of return = 25% (based on average investment) and that the average net income of the project is $100,000. How much did the company invest in the project?
4. Suppose that a project has an accounting rate of return = 50% and that the investment is $200,000. What is the average income earned by the project?