Question

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts
Initial investment $400,000 $600,000
Annual net income 30,000 46,000
Net annual cash inflow 110,000 146,000
Estimated useful life 5 years 6 years
Salvage value -0- -0-
The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1
Periods 9% 10% 11% 12%
5 3.890 3.791 3.696 3.605
6 4.486 4.355 4.231 4.111
The annual rate of return for Project Soup is



7.5%.

27.5%.

55%.

15.0%.

Answer 1

15.0%.

Step-by-step explanation:

The formula to compute the annual rate of return is shown below:

= Annual net income ÷ average investment

where,

Annual net income is $30,000

And, the average investment would be

= (Initial investment + salvage value) ÷ 2

= ($400,000 + $0) ÷ 2

= $400,000 ÷ 2

= $200,000

Now put these values to the above formula

So, the rate would equal to

= $30,000 ÷ $200,000

= 15%