Question

1.[The following information applies to the questions displayed below.]

Peng Company is considering an investment expected to generate an average net income after taxes of $2,600 for three years. The investment costs $54,900 and has an estimated $10,500 salvage value.

Compute the accounting rate of return for this investment; assume the company uses straight-line depreciation.
2.

The following information applies to the questions displayed below.]

Peng Company is considering an investment expected to generate an average net income after taxes of $2,600 for three years. The investment costs $54,900 and has an estimated $10,500 salvage value.

Assume Peng requires a 5% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign.)

Answer 1

1	Accounting Rate of Return =	Average Return during the period /Average Investment
	Average Investment=	Book value at the beginning + Book value at end /2
	=	(54900+10500)/2
	=	32700
	Average Return
	Net income	2600
	Depreciation	14800
	Total	17400
	ARR=	17400/32700
	=	0.53211	or 53.21%
2	Year		DCF @ 5%	PV
	0	-54900	1	-54900
	1	17400	0.95	16571.43
	2	17400	0.91	15782.31
	3	27900	0.86	24101.07
			NPV	1554.81