A Project Has an Initial Cost of $61,000 and a 5-Year

question 176

Multiple Choice

A project has an initial cost of $61,000 and a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The projected net income from the project is $1,500, $1,600, $1,900, $2,100, and $2,200 a year for the next five years, respectively. What is the average accounting rate of return?

• A) 6.10 %
• B) 7.62 %
• C) 7.97 %
• D) 8.48 %
• E) 9.42 %

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Definitions:

Operating Income

This is the profit realized from a business's operations, after deducting operating expenses such as wages and cost of goods sold but before interest and taxes.

Acceptable Operating Income

The level of earnings from core operations deemed satisfactory by management, often in line with industry benchmarks or internal targets.

DuPont Formula

A method for analyzing components of return on equity to understand what factors are driving or affecting it.

Profit Margin

A financial metric used to evaluate a company's financial health by revealing the percentage of revenue that exceeds the costs associated with making or selling its products or services.