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

question 60

Multiple Choice

A company is evaluating three possible investments. Each uses straight-line method of depreciation. Following information is provided by the company. $$\begin{array} { | l | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } \\\hline \text { Investment } & \$ 200,000 & \$ 50,000 & \$ 200,000 \\\hline \text { Salvage value } & 0 & 5,000 & 10,000 \\\hline \text { Net cash flows: } & & & \\\hline \text { Year 1 } & 50,000 & 25,000 & 80,000 \\\hline \text { Year 2 } & 50,000 & 16,000 & 50,000 \\\hline \text { Year 3 } & 50,000 & 12,000 & 60,000 \\\hline \text { Year 4 } & 50,000 & 9,000 & 20,000 \\\hline \text { Year 5 } & 50,000 & & 0 \\\hline\end{array}$$
-What is the accounting rate of return for Project B?

• A) 15.08%
• B) 10.214%
• C) 15.45%
• D) 14.54%

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Definitions:

Total Cost

The sum of fixed and variable costs incurred in the production of goods or services.

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