Question

Caruso Hardware is adding a new product line that will require an investment of $1,460,000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $320,000 the first​ year, $290,000 the second​ year, and $260,000 each year thereafter for eight years. The investment has no residual value. Compute the ARR for the investment.

Answer 1

Annua depreciation = (cost - residual value) / life of the assets

= ($1,460,000 - 0)10

= $146,000

Year	Cash Infows	Less: Depreciation	Net profit
1	$320,000	$146,000	$174,000
2	$290,000	$146,000	$144,000
3	$260,000	$146,000	$114,000
4	$260,000	$146,000	$114,000
5	$260,000	$146,000	$114,000
6	$260,000	$146,000	$114,000
7	$260,000	$146,000	$114,000
8	$260,000	$146,000	$114,000
9	$260,000	$146,000	$114,000
10	$260,000	$146,000	$114,000
Tota profit	$1,230,000
Average net profit ($1,230,000/10 years)	$123,000

ARR = Average net profit / Average investment

= $123,000 / [($1460000+0)/2]

= 16.85%