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: $74,000, $79,000, $82,000, $90,000, and $100,000.

Required:

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

	Net Income
Year 1	$fill in the blank 1
Year 2	$fill in the blank 2
Year 3	$fill in the blank 3
Year 4	$fill in the blank 4
Year 5	$fill in the blank 5

2. Calculate the accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16"). fill in the blank 6 %

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): $100,000, $100,000, $100,000, $74,000, and $25,500? Calculate its accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16"). fill in the blank 7 %

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

First projectSecond projectFirst project

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

It provides more total cash returns over its useful lifeIt returns larger amounts of cash sooner than the first projectIt has a better ARR than the first projectIt returns larger amounts of cash sooner than the first project