Accounting Rate of Return

WeCare Clinic is planning on investing in some new echocardiogram equipment that will require an initial outlay of $150,000. 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: $68,000, $81,000, $83,000, $86,000, and $105,000.

Required:

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

	Net Income
Year 1	$
Year 2	$
Year 3	$
Year 4	$
Year 5	$

2. Calculate the accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16"). %

3. What if a second competing revenue-producing investment has the same initial outlay and salvage value but the following cash flows (in chronological sequence): $105,000, $105,000, $105,000, $68,000, and $20,000? Calculate its accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16"). %

Using the accounting rate of return metric, which project should be selected: the first or the second?

Why might the second project be preferred over the first project?