Question

Requirement 1:

Initial Investment = \$560,000
Salvage Value = \$28,000
Useful Life = 4 years

Annual Depreciation = (Initial Investment - Salvage Value) / Useful Life
Annual Depreciation = (\$560,000 - \$28,000) / 4
Annual Depreciation = \$133,000

Payback Period = Cost of Investment / Annual Net Cash Flow
Payback Period = \$560,000 / \$241,500
Payback Period = 2.32 years

Annual Average Investment = (Initial Investment + Salvage Value) / 2
Annual Average Investment = (\$560,000 + \$28,000) / 2
Annual Average Investment = \$294,000

Accounting Rate of Return = Annual Net Income / Annual Average Investment
Accounting Rate of Return = \$108,500 / \$294,000
Accounting Rate of Return = 36.90%

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