# Finance: Average Accounting Return, NPV, Payback Period

Colin's Haberdashery Products is considering a project that would have an initial cost of $285,000 and a 4-year life. The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. Projected cash flow from the project is forecast at $83,650, $92,850, $94,350 and $93,250 respectively for the next 4 years. Projected annual net income from the project is forecast at $12,400, $21,600, $23,100 and $22,000 for the next 4 years, respectively. What is the average accounting return?

6.94 percent

13.88 percent

15.66 percent

27.75 percent

31.31 percent

Symbiotic Accounting Products is considering launching a project with an initial cost of $7,800. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800 and $4,500 a year over the next four years respectively?

3.21 years

3.28 years

3.36 years

4.21 years

4.29 years

The Mitre Box Company is considering a project with an initial cost of $35,000 and future cash inflows of $20,000, $15,000, $10,000 and $5,000 over the next four years respectively. If the company requires a 9.5 percent rate of return, should the company accept the project?

No; the NPV is negative.

Yes; the NPV is $3,874.

Yes; the NPV is $5,207.

Yes; the NPV is $6,869.

Cannot be determined from the information given.

Campbell's Coffee Shop is trying to analyze a project that requires a $135,000 investment in fixed assets. When the project ends, those assets are expected to have an after-tax salvage value of $35,000. How should Campbell handle the $35,000 salvage value when computing the net present value of the project?

do not include in the net present value computation

reduce the cash outflow at time zero

add to cash inflow in the final year of the project

add to cash inflow in the year following the final year of the project

prorate and add to cash inflow over the life of the project

A company purchased a piece of milling equipment 4 years ago for $149,000 and at the beginning of last year spent $11,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has rec'd an offer of $110,000 from a firm to purchase it. The company is debating whether to sell it or expand operations so that the equipment can be used. When evaluating the expansion option, what value, if any should the firm assign to this equipment as an initial cost of the project?

$0

$21,000

$89,000

$110,000

$160,000

A company is considering a new 4 year expansion project that requires an initial investment of $3 million. The fixed asset will be depreciated straight line to zero over its 4 year tax life after which time it will be sold. Assume it will be sold for $231,000, it's estimated market value at the end of 4 years. The project requires an initial investment in net working capital of $330,000 all of which will be recovered at the end of the project. The project is estimate to generate $2,640,000 in annual sales with costs of $1,056.000. The tax rate is 30 percent and the required return for the project is 11.5 percent. What is the net present value for this project?

$1,082,378

$1,127, 215

$1,333, 800

$1,825,500

$1,202, 965

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#### Solution Preview

Colin's Haberdashery Products is considering a project that would have an initial cost of $285,000 and a 4-year life. The project’s assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. Projected cash flow from the project is forecast at $83,650, $92,850, $94,350 and $93,250 respectively for the next 4 years. Projected annual net income from the project is forecast at $12,400, $21,600, $23,100 and $22,000 for the next 4 years, respectively. What is the average accounting return?

Average income=(12400+21600+23100+22000)/4=$19,775

Average capital invested=(285000+0)/2=$142,500

ARR=Average income/Average capital invested=19775/142500=13.88%

Symbiotic Accounting Products is considering launching a project with an initial cost of ...

#### Solution Summary

Solutions to given problems depict the methodology to calculate ARR, payback, NPV and initial cost.