Question

Robins Hardware is adding a new product line that will require an investment of $ 1 comma 418 comma 000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 300 comma 000 the first​ year, $ 270 comma 000 the second​ year, and $ 260 comma 000 each year thereafter for eight years. Assume the project has no residual value. Compute the ARR for the investment. Round to two places.

Answer 1

ARR = 18.69%

Step-by-step explanation:

The accounting rate of return will be the average cash flow divide by the investment needed to generate those cash flow.

`(Average \:Cash \:Flow)/(Investment) = $Accounting rate of Return`

Total Cash flow

300,000 + 270,000 + 260,000 x 8 = 2,650,000

Average Cash flow:

total cash flow / life of the project

2,650,000 / 10 = 265,000

Investment = 1,418,000

265,000/1,418,000 = 0.1868829 = 18.69%

Is important to notice this rate, do not consider the time value of cash and thetime at which the cash flow are generated.