Falcon Crest Aces (FCA), Inc., is considering the purchase of a
small plane to use in its wing-walking demonstrations and aerial
tour business. Various information about the proposed investment
follows:
| Initial investment | $ | 140,000 | |||||
| Useful life | $ | 10 | years | ||||
| Salvage value | 10,000 | ||||||
| Annual net income generated | $ | 3,400 | |||||
| FCA's cost of capital | 6 | % | |||||
Assume straight line depreciation method is used.
rev: 04_20_2017_QC_CS-86552
3.
value:
2.85 points
Required information
Required:
Help FCA evaluate this project by calculating each of the
following:
1. Accounting rate of return. (Round your
answer to 2 decimal places.)
Accounting Rate of Return is also referred to as the 'Average rate of return'. It refers to the financial ratio computed without taking into account the time value of money. ARR computes the return generated from the capital investmented. Simply stated, ARR @ 10% means that the invested capital is expected to earn 10 points per unit of currency invested.
It is computed as; ARR = Average return during the period (divided by) Average investment
| Depreciation (SLM) | (140000-10000)/10 |
| 13000 | |
| Value of investment | |
| Year 1 | 140000 |
| Year 10 (13000 x 10 years) | 10000 |
| Average | (140000+10000)/2 |
| 75000 | |
| ARR | 3400/75000 |
| 4.53% |
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