Question

Self-Study Problem 10.03 a1-a2 (Part Level Submission) Sunland Corp. management is considering purchasing a machine that will cost $117,250 and will be depreciated on a straight-line basis over a five-year period. The sales and expenses (excluding depreciation) for the next five years are shown in the following table. The company’s tax rate is 34 percent. Year 1 Year 2 Year 3 Year 4 Year 5 Sales $123,450 $181,875 $240,455 $258,440 $267,125 Expenses $143,410 $124,488 $146,289 $138,112 $137,556 Sunland will accept all projects that provide an accounting rate of return (ARR) of at least 45 percent.

(a1) Calculate accounting rate of return. (Round answer to 1 decimal place, e.g. 15.2%.) Accounting rate of return % Click if you would like to Show Work for this question: Open Show Work

Sunland Corp. management is considering purchasing a machine that will cost $117,250 and will be depreclated on a straight-line basis over a five-year period. The sales and expenses (excluding depreciation) for the next flve years are shown in the following table. The company's tax rate is 34 percent. Year 1 Year 2 Year 3 Year 4 Year 5 Sales Exnonror 1d2 410 e134 488 t146 280 t138 112 137 556 Sunland will accept all projects that provide an accounting rate Freturn (ARR) of at least 45 percent. Calculate accounting rate of return. (Round answer to 1 decimal place, e.g. 15.2%.) Accounting rate of return click if you would like to Show Work for this question: Qpen Show Work

Answer 1

Step 1: Compute Net Income per year

	1	2	3	4	5
Sales	123450	181875	240455	258440	267125
Expenses	143410	124488	146289	138112	137556
Depreciation (117250/5)	23450	23450	23450	23450	23450
Profit before tax	-43410	33937	70716	96878	106119
Less: Tax	-14759.4	11538.58	24043.44	32938.52	36080.46
Net Income	-28650.6	22398.42	46672.56	63939.48	70038.54

Step 2: ARR = Average Net Income/ Average Investment

= ((-28650.6+22398.42+46672.56+63939.48+70038.54)/5 ) / (117250+0)/2

=59.5%

Step 3: Conclusion

Accept the project since its ARR is more than 45%