The Consumer Products Company has \(\$ 300,000\) of total assets. The Consumer Products Company has been earning \(\$ 45,000\) per year and generating \(\$ 45,000\) per year of cash flow from operations. Each year the Consumer Products Company distributes its earnings by paying cash of \(\$ 45,000\) to owners. Management of the Consumer Products Company believes that a new advertising campaign now will lead to increased sales over the next 4 years. The anticipated net cash flows of the project are as follows:

Assume that the advertising campaign is undertaken, that cash flows are as planned, and that the Consumer Products Company makes payments to owners of \(\$ 45,000\) at the end of the first year and \(\$ 47,000\) at the end of each of the next 3 years. Assume that there are no interest expenses in any year. Ignore any income tax effects.
a Compute net income and the all-capital earnings rate of the Consumer Products Company for each of the 4 years, assuming that advertising expenditures are expensed as they occur. Use the year-end balance of total assets in the denominator of the all-capital earnings rate.
b Compute net income and the all-capital earnings rate of the Consumer Products Company for each year of the project, assuming that advertising costs are capitalized and then amortized on a straight-line basis over the last 3 years. Use the year-end balance of total assets in the denominator of the all-capital earnings rate.
c How well has the management of the Consumer Products Company carried out its responsibility to its owners? On what basis do you make this judgment? Which method of accounting seems to reflect performance more adequately?

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Beginning of Year 1. 2, 3, and 4 Net Cash (Outflow) Inflow ($24,000) 10,000 each year