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

a. Wysocki 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 five years with no expected salvage value. The expected cash flows associated with the project are as follows:

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

c. Suppose that a project has an accounting rate of return of 30 percent (based on initial investment) and that the average net income of the project is $120,000.
d. Suppose that a project has an accounting rate of return of 50 percent and that the investment is $150,000.
Required:

1. Compute the ARR on the new equipment that Wysocki Company is considering.
2. Which project should Marlene Straithe choose based on the ARR? Notice that the payback period is the same for both investments (thus equally preferred). Unlike the payback period, explain why ARR correctly signals that one project should be preferred over the other.
3. How much did the company in scenario (c) invest in the project?
4. What is the average income earned by the project in scenario (d)?

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Cash Revenues Cash Expenses Year 1 $6,000,000 $4,800,000 4,800,000 4,800,000 4,800,000 6,000,000 4 5 6,000,000 Project A Project B Year 1 $22,500 $22,500 30,000 37,500 3 4 45,000 22,500 22,500 75,000