The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted. Project A Project B Project C Initial Cost 240,000.00 260,000.00 200,000.00 Expected life 5 5 4 Scrap value expected 10,000.00 15,000.00 10,000.00 Expected Cash Inflows: End Year 1 85,000.00 95,000.00 45,000.00 End Year 2 70,000.00 70,000.00 65,000.00 End Year 3 65,000.00 55,000.00 95,000.00 End Year 4 60,000.00 50,000.00 100,000.00 End Year 5 50,000.00 50,000.00 The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%. Periods 14% 18% 22% 1 0.877 0.847 0.820 2 0.769 0.718 0.672 3 0.675 0.609 0.551 4 0.592 0.516 0.451 5 0.519 0.437 0.370 6 0.456 0.370 0.303 Required: Calculate:(b) The accounting rate of return for each project
The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted. Project A Project B Project C Initial Cost 240,000.00 260,000.00 200,000.00 Expected life 5 5 4 Scrap value expected 10,000.00 15,000.00 10,000.00 Expected Cash Inflows: End Year 1 85,000.00 95,000.00 45,000.00 End Year 2 70,000.00 70,000.00 65,000.00 End Year 3 65,000.00 55,000.00 95,000.00 End Year 4 60,000.00 50,000.00 100,000.00 End Year 5 50,000.00 50,000.00 The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%. Periods 14% 18% 22% 1 0.877 0.847 0.820 2 0.769 0.718 0.672 3 0.675 0.609 0.551 4 0.592 0.516 0.451 5 0.519 0.437 0.370 6 0.456 0.370 0.303 Required: Calculate:(b) The accounting rate of return for each project
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted.
| Project A | Project B | Project C | |
| Initial Cost | 240,000.00 | 260,000.00 | 200,000.00 |
| Expected life | 5 | 5 | 4 |
| Scrap value expected | 10,000.00 | 15,000.00 | 10,000.00 |
| Expected |
|||
| End Year 1 | 85,000.00 | 95,000.00 | 45,000.00 |
| End Year 2 | 70,000.00 | 70,000.00 | 65,000.00 |
| End Year 3 | 65,000.00 | 55,000.00 | 95,000.00 |
| End Year 4 | 60,000.00 | 50,000.00 | 100,000.00 |
| End Year 5 | 50,000.00 | 50,000.00 |
The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%.
| Periods | 14% | 18% | 22% |
| 1 | 0.877 | 0.847 | 0.820 |
| 2 | 0.769 | 0.718 | 0.672 |
| 3 | 0.675 | 0.609 | 0.551 |
| 4 | 0.592 | 0.516 | 0.451 |
| 5 | 0.519 | 0.437 | 0.370 |
| 6 | 0.456 | 0.370 | 0.303 |
Required:
Calculate:
(b) The accountingrate of return for each project
(b) The accounting
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