A Company Is Evaluating Three Possible Investments What Is the Accounting Rate of Return for Project B

question 8

Multiple Choice

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.Following information is provided by the company: $$\begin{array} { | l | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } \\\hline \text { Investment } & \$ 230,000 & \$ 54,000 & \$ 230,000 \\\hline \text { Residual value } & 0 & 12,000 & 36,000 \\\hline \text { Net cash inflows: } & & & \\\hline \text { Year 1 } & 56,000 & 38,000 & 94,000 \\\hline \text { Year 2 } & 56,000 & 29,000 & 64,000 \\\hline \text { Year 3 } & 56,000 & 25,000 & 74,000 \\\hline \text { Year 4 } & 56,000 & 22,000 & 34,000 \\\hline \text { Year 5 } & 56,000 & 0 & 0 \\\hline\end{array}$$ What is the accounting rate of return for Project B? (Round your answer to two decimal places.)

• A) 38.14%
• B) 26.19%
• C) 54.55%
• D) 51.83%

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Definitions:

Fiscal Year-End

Fiscal Year-End is the conclusion of a 12-month accounting period for a business or organization, used for financial reporting and tax purposes.

Automatic Extension

A granted period beyond the original due date for filing tax returns without needing to explain the reason for the delay.

FMV

Fair Market Value, the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

Basis

The amount of investment in something for tax purposes, used to calculate gain or loss when the property is sold.