Ferguson Medical, Inc., is planning on investing in some new echocardiogram equipment that will require an initial outlay of $100,000. The system has an expected life of five years and no expected salvage value. The investment is expected to produce the following net cash flows over its life: $40,000, $40,000, $50,000, $50,000, and $60,000.

Required:

1. Calculate the annual net income for each of the five years.

2. Calculate the accounting rate of return.

3. What ifasecond competing revenue-producing investment has the same initial outlay and salvage value but the following cash flows (in chronological sequence):

$60,000, $60,000, $60,000, $40,000, and $10,000? Using the accounting rate of return metric, which project should be selected: the first or the second? Which project is really the better of the two?

LO1