Question

10. Over the River Manufacturing purchased a machine for $394,000 with an expected useful lite of 5 years and expected salvage value of $24,000. Over the River anticipates a yearly after-tax income of $53,000, earned evenly throughout the year. What is the accounting rate of return on this machine? 17. Puddle Jumper Productions is considering a 4-year project, planning to invest $56,000 now and forecasting cash flows for each year of $18,000. The CEO requires a hurdle rate of 10%. Should this project be accepted? Internal rate of return Accept or Reject Project? Reasoning?

Answer 1

Answer to Question 16:

Initial Investment = $394,000
Annual Income = $53,000

Accounting Rate of Return = Annual Income / Initial Investment
Accounting Rate of Return = $53,000 / $394,000
Accounting Rate of Return = 13.45%

Answer to Question 17:

Cash Flows:
Year 0 = -$56,000
Year 1 = $18,000
Year 2 = $18,000
Year 3 = $18,000
Year 4 = $18,000

Let IRR be i%

NPV = -$56,000 + $18,000/(1+i) + $18,000/(1+i)^2 + $18,000/(1+i)^3 + $18,000/(1+i)^4
0 = -$56,000 + $18,000/(1+i) + $18,000/(1+i)^2 + $18,000/(1+i)^3 + $18,000/(1+i)^4

Using financial calculator, i = 10.87%

IRR of the project is 10.87%

IRR of the project is higher than the hurdle rate; therefore, you should accept this project.