Buckhead Shop Is Considering the Purchase of a Used Printing

question 152

Multiple Choice

Buckhead Shop is considering the purchase of a used printing press costing $19,200.The printing press would generate a net cash inflow of $8,000 per year for five years.At the end of three years,the press would have no salvage value.The company's cost of capital is 10%.The company uses straight-line depreciation with no mid-year convention. Assume no taxes are paid.What would be the accounting rate of return on the original investment in the press to the nearest percent?

• A)8.33%
• B)10.00%
• C)21.67%
• D)75.00%

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Definitions:

Required Return

The minimum expected yield that investors demand for investing in a financial asset, taking into account the risk associated with the investment.

Beta

A measure of a stock's volatility in relation to the overall market; a beta higher than 1 indicates the stock is more volatile than the market.

Dividend Growth Rate

The annualized percentage rate of growth of a company's dividend payments to shareholders.

T-Bill Rate

The yield or interest rate paid to investors of U.S. Treasury bills, a short-term government security.