Question

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.)

    

Answer 1

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%