Question

Robins Hardware is adding a new product line that will require an investment of $ 1 comma 418 comma 000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 320 comma 000 the first​ year, $ 290 comma 000 the second​ year, and $ 250 comma 000 each year thereafter for eight years. Assume the project has no residual value. Compute the ARR for the investment. Round to two places. Select the​ formula, then enter the amounts to calculate the ARR​ (accounting rate of​ return) for the new product line.​ (Round ARR to the nearest hundredth percent​ [two decimal​ places], X.XX%.) / = ARR / = %

Answer 1

Solution:

Calculation of Accounting Rate of Return (ARR):

ARR (in %)= (Average Annual Accounting Profit / Initial Investment) * 100

  = (119,200 / 1,418,000) * 100

= 8.40%

Note:

Initial Investment = $1,418,000 is given.

Life of Investment = 10 years is given.

Total Net Cash Inflow = $320,000 + $290,000 + $250,000 + $250,000 + $250,000 + $250,000 + $250,000 + $250,000 + $250,000 + $ 250,000

= $2,610,000

Average Annual Operating Income = (Total Net Cash Inflow - Initial Cost / Life in years

= (2,610,000 - 1,418,000) / 10

= 1,192,000 / 10

= $119,200