Pick the correct answer, show work Darth Company is considering the purchase of
ID: 2343440 • Letter: P
Question
Pick the correct answer, show work
Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of 8 years with no expected salvage value. The expected cash flows associated with the project are as follows:
Year Cash Revenues Cash Expenses & Depreciation
1 $2,400,000 $1,900,000
2 $2,400,000 $1,900,000
3 $2,400,000 $1,900,000
4 $2,400,000 $1,900,000
5 $2,400,000 $1,900,000
6 $2,400,000 $1,900,000
7 $2,400,000 $1,900,000
8 $2,400,000 $1,900,000
What is the accounting rate of return for the project?
a. 25%
b. 3.125%
c. 400%
d. 83.33%
e. 120%
Explanation / Answer
The formula is average profit/average investment so we have (2,400-1,900)/2,000 500/2,000= 1/4= 25% (a).