Question

Wildhorse Corp. management is expecting a project to generate after-tax income of $78,310 in each of the next three years. The average book value of the project's equipment over that period will be $243,460. If the firm's investment decision on any project is based on an ARR of 37.5 percent. (Round answer to 1 decimal place, es, p.2%)

What is the project's accounting rate of return? Accounting rate of return is ____
Should the firm accept this project? The firm should ____ the project

Answer 1

The project's accounting rate of return (ARR) is 32.1%, which is below the firm's criteria of 37.5%. Consequently, the firm should not accept the project.

Step-by-step explanation:

The accounting rate of return (ARR) is calculated by dividing the average annual after-tax income by the average book value of the investment. In this case, the average after-tax income is $78,310, and the average book value is $243,460. So, the ARR is calculated as follows:

ARR = (Average Annual After-Tax Income) / (Average Book Value of the Investment).

ARR = $78,310 / $243,460.

ARR = 0.3214, or 32.1% when expressed as a percentage.

Since Wild horse Corp.'s investment decision is based on an ARR of 37.5%, and the project's ARR is 32.1%, it is below the firm's required ARR. Therefore, the firm should not accept the project based on this criterion.