LCK Fish Farm, a local fish farm, is considering purchasing a new plot of land for their business for $600,000. The land would allow LCK to increase their pre-tax operating income (and cash flow) by $200,000 each year. The company would plan to keep the land for 25 years before selling it for $800,000. Because the land is real property, the company would not take any related depreciation. Alternatively, LCK could purchase a new hatchery facility for $450,000. The hatchery would return $130,000 each year for 25 years, and would be fully depreciated over its 25-year useful life, at which point it would be sold for $100,000. LCK's tax rate is 30%, and the required rate of return is 8%.
a. Based on the Average Rate of Return, which project is more attractive?
b. Based on NPV, which project is more attractive? Use a financial calculator to compute NPV.

Question

LCK Fish Farm, a local fish farm, is considering purchasing a new plot of land for their business for $600,000. The land would allow LCK to increase their pre-tax operating income (and cash flow) by $200,000 each year. The company would plan to keep the land for 25 years before selling it for $800,000. Because the land is real property, the company would not take any related depreciation. Alternatively, LCK could purchase a new hatchery facility for $450,000. The hatchery would return $130,000 each year for 25 years, and would be fully depreciated over its 25-year useful life, at which point it would be sold for $100,000. LCK's tax rate is 30%, and the required rate of return is 8%. 
a. Based on the Average Rate of Return, which project is more attractive?
b. Based on NPV, which project is more attractive? Use a financial calculator to compute NPV.

Quizplus · Accepted Answer

The Answer of LCK Fish Farm, a local fish farm, is considering purchasing a new plot of land for their business for $600,000. The land would allow LCK to increase their pre-tax operating income (and cash flow) by $200,000 each year. The company would plan to keep the land for 25 years before selling it for $800,000. Because the land is real property, the company would not take any related depreciation. Alternatively, LCK could purchase a new hatchery facility for $450,000. The hatchery would return $130,000 each year for 25 years, and would be fully depreciated over its 25-year useful life, at which point it would be sold for $100,000. LCK's tax rate is 30%, and the required rate of return is 8%. 
a. Based on the Average Rate of Return, which project is more attractive?
b. Based on NPV, which project is more attractive? Use a financial calculator to compute NPV.

LCK Fish Farm, a Local Fish Farm, Is Considering Purchasing