Question

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

Project Soup Project Nuts
Initial investment $400000 $600000
Annual net income 38000 54000
Net annual cash inflow 114000 140000
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:__________

a. 9.5%.
b. 19.0%.
c. 57.0%.
d. 28.5%.

Answer 1

B

Step-by-step explanation:

Annual rate of return = Average net income / Average book value

Average book value = (cost of equipment - salvage value) / 2

(400,000 - 0) / 2 = $200,000

$38,000 / $200,000 = 0.19 = 19%