Question

Redwood Corporation is considering two alternative investment proposals with the following​ data: Proposal X Proposal Y Investment $ 810 comma 000 $ 498 comma 000 Useful life 8 years 8 years Estimated annual net cash inflows for 8 years $ 135 comma 000 $ 64 comma 000 Residual value $ 10 comma 000 ​$minus Depreciation method Straightminusline Straightminusline Required rate of return 19​% 8​% What is the accounting rate of return for Proposal​ X?

Answer 1

Accounting rate of return = 0.0432 = 4.32%

Explanation :

As per the data given in the question,

Depreciation per year = (Cost - Salvage) ÷ Useful life

= ($810,000 - $10,000) ÷ 8 years

= $100,000

Annual Net income = Annual net cash flow - Depreciation

= $135,000 - $100,000

= $35,000

Accounting rate of return = Annual net income ÷ investment

= $35,000 ÷ $810,000

= 0.0432

= 4.32%

We simply applied the above formula