Question

**Payback Period and Accounting Rate of Return: Equal
Annual Operating Cash Flows with Disinvestment**

Roopali is considering an investment proposal with the following
cash flows:

Initial investment-depreciable assets | $39,000 |

Initial investment-working capital | 6,000 |

Net cash inflows from operations (per year for 6 years) | 9,000 |

Disinvestment-depreciable assets | 3,000 |

Disinvestment-working capital | 2,000 |

For parts b. and c., round answers to **three decimal
places**, if applicable.

a. Determine the payback period.

Answer

years

b. Determine the accounting rate of return on initial
investment

Answer

c. Determine the accounting rate of return on average
investment

Answer

Answer #1

Answer-a)- Pay-back period = Total initial investments/Annual net cash inflows

= (Investment in depreciable assets+ Investment in Working capital)/ Annual net cash inflows

= ($39000+$6000)/$9000

= $45000/$9000

= 5 years

b)- Accounting rate of return on initial investment = (Annual net profit/Total Initial Investment)*100

= ($3000/$45000)*100

= 6.667%

Explanation- Annual Net Profit = Annual cash inflows – Annual depreciation

= $9000 - $6000

= $3000

Where- Annual depreciation = (Investment in depreciable assets - Disinvestment depreciable assets)/useful life

= ($39000-$3000)/6 years

= $36000/6 years

= $6000

c)- Accounting rate of return on average investment = (Annual net profit/Average Investment)*100

= ($3000/$25000)*100

= 12%

Explanation- Average Investment = (Total Investment + Total Disinvestment)/2

= ($39000+$6000+$3000+$2000)/2

= $50000/2

= $25000

Annual net profit = $3000

Payback Period and Accounting Rate of Return: Equal
Annual Operating Cash Flows with Disinvestment
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Initial investment-depreciable assets
$28,000
Initial investment-working capital
4,000
Net cash inflows from operations (per year for 8 years)
8,000
Disinvestment-depreciable assets
4,000
Disinvestment-working capital
2,000
For parts b. and c., round answers to three decimal
places, if applicable.
a. Determine the payback period.
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0
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