Question

The Even Cut Co. is considering opening a new plant to produce lawn mowers. The initial...

The Even Cut Co. is considering opening a new plant to produce lawn mowers. The initial cost of the project is $6 million. This cost will be depreciated straight-line to a zero book value over the 15-year life of the project. The net income of the project is expected to be $137,000 a year for the first four years and $538,000 for years 5 through 15, respectively. What is the average accounting return on this project?

14.37 percent

Homework Answers

Answer #1

Initial cost = $6 million.

Useful Life = 15 years

Salvage Value = 0

Net income (year 1 to Year 4) = $137,000 each year

Net Income (year 5 to year 15) = $538,000

Average Accounting Profit = (137000*4+538000*11)/15 = $431,066.67

Average Investment = (Initial Cost + Salvage Value)/2 = (6,000,000+0)/2 = $3,000,000.00

Average Accounting return = Average accounting profit/Average Investment

Average Accounting return = 431066.67/3000000 = .1437 or 14.37%

Hence, average accounting return = 14.37%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The Even Cut Co. is considering opening a new plant to produce lawn mowers. The initial...
The Even Cut Co. is considering opening a new plant to produce lawn mowers. The initial cost of the project is $6 million. This cost will be depreciated straight-line to a zero book value over the 15-year life of the project. The net income of the project is expected to be $137,000 a year for the first four years and $538,000 for years 5 through 15, respectively. What is the average accounting return on this project? why average net investment...
You are considering opening a new plant. The plant will cost $102.8 million up front and...
You are considering opening a new plant. The plant will cost $102.8 million up front and will take one year to build. After that it is expected to produce profits of $28.8 million at the end of every year of production​ (starting two years from​ now). The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.7%. Should you make the​ investment? Calculate the IRR and use it to...
You are considering opening a new plant. The plant will cost $96 million upfront. After that,...
You are considering opening a new plant. The plant will cost $96 million upfront. After that, it is expected to produce constant profits at the end of every year (the first profits arrive at t=1). The cash flows are expected to last forever. The discount rate is 7%. At what profits amount would you breakeven in the plant investment? [15 marks]
A new project has an initial cost of $170,000. The equipment will be depreciated on a...
A new project has an initial cost of $170,000. The equipment will be depreciated on a straight-line basis to a zero book value over the five-year life of the project. The projected net income each year is $12,450, $16,400, $18,320, $14,350, and $10,300, respectively. What is the average accounting return?
Vita-Chips Co. has invested in a new plant that will produce nutritious corn chips. The initial...
Vita-Chips Co. has invested in a new plant that will produce nutritious corn chips. The initial cost is $120 million. The company anticipates net cash flows of $60 million next year, $40 million, $20 million, $10 million, $5 million and then $0 over each of the following years. Vita-Chips require a 10% return per year on their investment. Calculate the net present value (NPV) of this investment. Should Vita accept the project? Please solve this without the use of excel...
XYZ Company is considering building a new warehouse in Yas. It will require an initial capital...
XYZ Company is considering building a new warehouse in Yas. It will require an initial capital investment of $ 10 000. The investment will have a three-year life, and will be depreciated on a straight line basis to a zero book value over the next three years. The new project will generate the following net income over each of the next three years for the company:    Year Expected Net Income ($) 1 500 2 1,000 3 1,500 Calculate the...
You are considering opening a new plant. The plant will cost $ 97.5 million up front...
You are considering opening a new plant. The plant will cost $ 97.5 million up front and will take one year to build. After that it is expected to produce profits of $ 28.1 million at the end of every year of production​ (starting two years from​ now). The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.9 %. Should you make the​ investment? Calculate the IRR and...
You are considering opening a new plant. The plant will cost $ 97.9 million up front...
You are considering opening a new plant. The plant will cost $ 97.9 million up front and will take one year to build. After that it is expected to produce profits of $ 28.6 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.2 %. Should you make the​ investment? Calculate the IRR and use it to determine the...
You are considering opening a new plant. The plant will cost $ 102.1 million up front...
You are considering opening a new plant. The plant will cost $ 102.1 million up front and will take one year to build. After that it is expected to produce profits of $ 30.5million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.3 % Should you make the​ investment? Calculate the IRR and use it to determine the maximum...
Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which...
Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight line to a zero book over the 10 year life of the project. at the end of the project the equipment will be sold for an estimated $300,000. the project will not directly produce any sales but will reduce operating costs by $725,000 a year. the tax rate is 35%. the project will require $45,000 of inventory which will be...