Pink Petunias, a wholesale nursery, is considering purchasing a new plot of land for their business for $300,000. The land would allow Pink Petunias to increase their pre-tax cash flows by $90,000 each year. The company would plan to keep the land for 20 years before selling it for $300,000. Because the land is real property, the company would not take any related depreciation. Pink Petunias' tax rate is 25%, and the required rate of return is 9%.
What is the Average Rate of Return of the proposed investment?

Question

Quizplus · Accepted Answer

Yearly Net Income Impact: $90,000 × (1 - 0.25) = $67,500
Gain recognized on disposal: $300,000 - $300,000 = $0
Total Net Income Impact: ($67,500 × 20 years) + $0 = $1,350,000
Average Net Income Impact = $1,350,000 / 20 = $67,500
Average Investment: ($300,000 + $300,000) / 2 = $300,000
ARR = $67,500 / $300,000 = 0.210 = 22.5%

Pink Petunias, a Wholesale Nursery, Is Considering Purchasing a New