Question

Joe's Hardware is adding a new product line that will require an investment of $ 1 comma 540 comma 000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 305 comma 000 the first​ year, $ 265 comma 000 the second​ year, and $ 230 comma 000 each year thereafter for eight years. The investment has no residual value. Compute the ARR for the investment. ​First, enter the​ formula, then compute the ARR of the new product line. ​(Enter your answer as a percent rounded to two decimal​ places

Answer 1

ARR=15.82%

Step-by-step explanation:

Joe's Hardware

Cash flow 1,540,000

Average Cash flow =305,000+265,000+(6×230,000)/8

Average Cash flow =305,000+265,000+1,380,000/8

=1,950,000/8

=243,750

ARR= Average Annual Operating Income/ Initial investment

=243,750/1,540,000

ARR=15.82%