Question

1. A project has an initial cost of $38,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,000, $1,200, $1,500, and $1,700 a year for the next four years, respectively. What is the accounting rate of return (ARR)?

   	A.	4.28%
   	B.	4.13%
   	C.	14.21%
   	D.	3.55%
   	E.	7.11%

2. Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairs were made to the building at an additional cost. The warehouse has a current market value of $295,000. The warehouse is totally paid for and solely owned by your firm. If the company decides to assign this warehouse to a new project, what value, if any, should be included in the initial cash flow of the project for this building?

	A.	$40,000
	B.	$335,000
	C.	$295,000
	D.	Warehouse cost is not a relevant incremental cash flow.
	E.	$0

Answer 1

Q1) D) 3.55%

Explanation:

Average net income = total net income / no. Of years

= 1,000 + 1,200 + 1,500 + 1,700 / 4

= 5,400 / 4

= $1,350

Accounting rate of return = average net income / initial investment

= 1,350 / 38,000

= 3.55%

Q2) E) $0

Explanation: The value included in the initial cashflow should be 0 . This is because the cost of warehouse for the new project is a sunk cost . The cost has already been incurred, so it need not be included in initial cashflow of the new project.