Question 3 (9 Marks)

The manager of K&K Ltd is considering a new investment opportunity at the end of December 2020. The company has two independent divisions: Division A and Division B. Any of these divisions can take responsibility for this investment opportunity. The companys cost of capital is 12%, which is the required rate of return for the company. The company has a required pay-back period of maximum 3.0 years.

The total investment of Division A is $840,000 and Division B is $980,000. The estimated divisional margin for 2021 (without considering the investment opportunity) of Division A is $102,000 and for Division B is $160,000.

The required investment to take this opportunity is $200,000, useful life is 4 years and residual value at the end of the useful life is $20,000. The net cash flows estimated from this investment are as follows (assume depreciation is the only non-cash expense):

Net cash flows year 2021 70,000

Net cash flows year 2022 110,000

Net cash flows year 2023 40,000

Net cash flows year 2024 30,000

Required:

1. Based on the Accounting Rate of Return (ARR) method, what would be the decision of the company regarding the investment (round to two decimal places)?

Average Profit =

Average investment =

ARR =

Recommendation? Why?