Accounting Rate of Return

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

Cobre Company is considering the purchase of new equipment that will speed up the process for extracting copper. The equipment will cost $3,600,000 and have a life of 5 years with no expected salvage value. The expected cash flows associated with the project are as follows:

Year		Cash Revenues		Cash Expenses
1		$6,000,000		$4,800,000
2		6,000,000		4,800,000
3		6,000,000		4,800,000
4		6,000,000		4,800,000
5		6,000,000		4,800,000

Emily Hansen is considering investing in one of the following two projects. Either project will require an investment of $75,000. The expected cash revenues minus cash expenses for the two projects follow. Assume each project is depreciable.

Year		Project A		Project B
1		$22,500		$22,500
2		30,000		30,000
3		45,000		45,000
4		75,000		22,500
5		75,000		22,500

Suppose that a project has an ARR of 30% (based on initial investment) and that the average net income of the project is $120,000.

Suppose that a project has an ARR of 50% and that the investment is $150,000.

Required:

1. Compute the ARR on the new equipment that Cobre Company is considering. Round your answer to one decimal place. %_________

3. How much did the company in Scenario c invest in the project? $__________

4. What is the average net income earned by the project in Scenario d? $__________