# Question

WeCare Clinic is planning on investing in some new echocardiogram equipment that will require an initial outlay of $170,000. 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, $68,000, $85,000, $85,000, and $102,000.

Required:

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

2. Calculate the accounting rate of return.

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): $102,000, $102,000, $102,000, $68,000, and $17,000? Using the accounting rate of return metric, which project should be selected: the first or the second? Which project is really the better of the two?

Required:

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

2. Calculate the accounting rate of return.

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): $102,000, $102,000, $102,000, $68,000, and $17,000? Using the accounting rate of return metric, which project should be selected: the first or the second? Which project is really the better of the two?

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