Sky High Company is considering the purchase of an investment of $250,000. Data related to the investment are as follows:
Cash flows (at the end of the next four years) $125,000
Salvage value of new investment $25,000
Proceeds from disposal of old investment $22,000
Book value of old investment $24,500
Investment in working capital $14,000
Tax Rate 21%
With a discount rate of 9%, what is the accounting rate of return of the investment?

Question

Quizplus · Accepted Answer

($250,000 + $14,000 - $22,000) = $242,000, ($125,000 - ($24,500 - $22,000) - (($250,000 - $25,000) ÷ 10) = $100,000 x (1-.21) = $79,000, $79,000 ÷ $242,000 = 32.6%
(cost + work cap. - Disp. proc.) = cost of invest., (cash flow - (book - proc.) - ((cost - sal. val.) ÷ 10) = Op. Inc. X (1- tax rate) = avg net inc., avg net inc. ÷ cost of invest

Sky High Company Is Considering the Purchase of an Investment