JP Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lr}
&\text { Project Echo}&\text { Project Charlie }\
\text { Initial investment } & \$ 400,000&\$600,000 \
\text { Annual net income } & 20,000 &42,000\
\text { Net annual cash inflow } & 100,000&142,000 \
\text { Estimated useful life } & 5 \text { years } &6 \text { years } \
\text { Salvage value } & 0&0
\end{array}$ The company requires an 11% rate of return on all new investments. $\begin{array}{lllll}
\text { Periods } & 9 \%&10 \% &11 \% &12 \%\
\hline5 & 3.890 & 3.791 & 3.696 & 3.605 \
6 & 4.486 & 4.355 & 4.231 & 4.111
\end{array}$
- The annual rate of return for Project Echo is
A) 5%.
B) 10%.
C) 25%.
D) 50%.

Question

Quizplus · Accepted Answer

The annual rate of return for Project Delta is:
- Initial investment: $100,000
- Annual cash inflows: $22,000
- Salvage value: $20,000
- Useful life: 5 years

Using the formula for the average rate of return:

Average annual net income / Average investment = Average rate of return

We can calculate the average annual net income as follows:

- Annual cash inflows: $22,000
- Annual depreciation expense: ($100,000 - $20,000) / 5 = $16,000
- Annual net income: $22,000 - $16,000 = $6,000

The average investment is ($100,000 + $20,000) / 2 = $60,000

Therefore, the average rate of return for Project Delta is:
$6,000 / $60,000 = 0.1, or 10%

Since the required rate of return for the company is 11%, Project Delta does not meet the minimum required rate of return and should not be pursued.

JP Company Is Considering Two Capital Investment Proposals The Company Requires an 11% Rate of Return on All