Share
Explore BrainMass

Accounting rate of return based on initial investment

Question 6
An initial investment of \$270,000 is expected to generate \$120,000 in annual cost savings over the asset's expected 3-year life. Assume straight-line depreciation and ignore income taxes. The accounting rate of return based on initial investment is:
a)11.11%
b)44.44%
c)33.33%
d)None of these answers is correct.

Question 7
Alice Maid Company will purchase a van for \$40,000. It will have a depreciable life of 5 years and no terminal salvage value. Assume a tax rate of 40% and a required after-tax rate of return of 12%. The present value of the after-tax saving from depreciation in year 2, if an accelerated method is used (of twice the straight-line rate), is:
a)\$2,551
b)\$3,827
c)\$6,378
d)None of these answers is correct.

Question 8
________ is the decline in the general purchasing power of the monetary unit.
a)Inflation
b)The nominal rate
c)The payback period
d)The accounting rate of return

Question 9
When comparing projects using the total project approach, a manager should:
a)choose the project with the largest positive net present value
b)choose the project with the largest negative net present value
c)choose the first project considered if the present value is positive
d)choose the second project considered if the present value positive

Question 10
At the current discount rate, the net present value of an 8-year project is zero. Assuming that the current discount rate and the annual cash flows are unchanged, identify which one of the following statements is true.
a)The project will be desirable if the project's life is increased to 10 years.
b)The project will be desirable if the project's life is reduced to 5 years.
c)The project is equally desirable at 5 and 10 years.
d)The project is equally undesirable at 5 and 10 years.

Solution Preview

Question 6
An initial investment of \$270,000 is expected to generate \$120,000 in annual cost savings over the asset's expected 3-year life. Assume straight-line depreciation and ignore income taxes. The accounting rate of return based on initial investment is:

a)11.11%

Profit = Annual savings- Depreciation
=120000-90000
=30000

Accounting rate of return based on initial investment = 30000/270000
= 11.11%

Question 7
Alice Maid ...

Solution Summary

This provides the steps to calculate the Accounting rate of return based on initial investment

\$2.19