Martice Smith and Associates is considering investing $5,000,000 in a new motel and has predicted the following

Question:

Martice Smith and Associates is considering investing $5,000,000 in a new motel and has predicted the following income stream over its 10-year life

Year NetIncome $(245,000) 2 -115,600 3 18,400 276,320 4 455,000 6. 1,066,700 1,150,000 1,069,300 1,055,700 10 1,000,250

The motel is expected to have no salvage value at the end of its 10-year life.

Required:

1. Using the ARR method, what is the rate of return for this project?

2. If Martice Smith and Associates requires 35 percent return on its investment, should this motel be purchased?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...