Exercise 3-10 Accounting rate ofreturn method and internal rate ofreturn method In a zoo, a new fish basin is to be installed. A capital expenditure of € 150,000 is necessary.

The period of use is assumed to be 30 years. Due to the increased attraction of the zoo, the number of visitors is going to increase from 400,000 to 406,250 people annually, paying an entrance fee of € 2.00 each. A further assumption refers to the annual operating costs of

€ 2,500 for the basin, in addition to the imputed costs.

a) Using a 6 % minimum interest rate, state whether the investment is worthwhile if you use the accounting rate of return method.

b) Calculate the internal rate of return of the investment.

c) Explain why there is a difference between the interest rate calculated in part b from the accounting rate of return. What are the consequences for your investment advice?