A company is evaluating three possible investments
Each uses the straight-line method of depreciation. Following information is provided by the company:
Project A Project B Project C
Investment $230,000 $54,000 $230,000
Residual value 0 12,000 36,000
Net cash flows:
Year 1 56,000 38,000 94,000
Year 2 56,000 29,000 64,000
Year 3 56,000 25,000 74,000
Year 4 56,000 22,000 34,000
Year 5 56,000 0 0
What is the accounting rate of return for Project B? (Round your answer to two decimal places.)
A) 38.14%
B) 26.19%
C) 54.55%
D) 51.83%
C .C)
*Average amount invested = (Amount invested + Residual value) / 2
ARR of Project B = Average annual operating income / Average amount invested
ARR = $18,000 / $33,000 = 54.55% (Rounded)
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