Question

Payback Period and Accounting Rate of Return: Equal Annual Operating Cash Flows without Disinvestment
Juliana is considering an investment proposal with the following cash flows:

Initial investment-depreciable assets	$49,000
Net cash inflows from operations (per year for 10 years)	7,000
Disinvestment	0

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

• [a]

A	Initial Investment	$49,000
B	Net cash inflow each year	$7,000
C = A/B	Payback period	7	years = Answer

• [b]

A	Initial Investment	$49,000
B	Life (years)	10
C = A/B	Depreciation annual	$4,900
D	Net Cash inflow	$7,000
E = D - C	Net Income	$2,100
F = (E/A) x 100	Accounting rate of return on initial investment	4.286%	Answer

• [c]

A	Net Income	$2,100
B	Beginning investment	$49,000
C	Disinvestments	$0
D = (B+C) / 2	Average Investment	$24,500
E = (A/D) x 100	Accounting rate of return on average investment	8.571%	Answer