Question

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

                                                Project Soup            Project Nuts

Initial investment                      $400,000                 $600,000

Annual net income                   $18,000                   34,000

Net annual cash inflow            $96,000                   119,000

Estimated useful life 5 years                    6 years

Salvage                                   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                              3.89         3.791       3.696       3.605

6                              4.486       4.355       4.231       4.111

The annual rate of return for Project Soup is

Answer 1

Calculation of Rate of Return of Project Soup :-

= ((Current Value of Investment - Initial Investment for one year )/Initial Investment for one year )*100

= (($96000 - $80000) / $80000) * 100

= ($16000 / $80000) *100

= 20%

Current Value of Investment = $96000

Initial Investment for one year = $400000 / 5 year = $80000