Question

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $340,000 investment for new machinery with a five-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project Y				Project Z
Sales		$	375,000			$	300,000
Expenses
Direct materials			52,500				37,500
Direct labor			75,000				45,000
Overhead including depreciation			135,000				135,000
Selling and administrative expenses			27,000				27,000
Total expenses			289,500				244,500
Pretax income			85,500				55,500
Income taxes (26%)			22,230				14,430
Net income		$	63,270			$	41,070

3. Compute each project’s accounting rate of return.

Accounting Rate of Return
	Choose Numerator:	/	Choose Denominator:	=	Accounting Rate of Return
		/		=	Accounting rate of return
Project Y					0
Project Z					0

Answer 1

Ans. 3	Accounting rate of return is the percentage ratio of net income on average investment.
	*First of all, average investment is to be caluclated.
	*Average investment =   (Cost of maching + Salvage value) / 2
	Project Y	($340,000 + 0) / 2	$170,000
	Project Z	($340,000 + 0) / 2	$170,000
	*Now we can calulate the accounting rate of return of both projects.
	Accounting rate of return =   Net income / Average investment * 100
	Project Y	$63,270 / $170,000 * 100	37.22%
	Project Z	$41,070 / $170,000 * 100	24.16%