Accounting Rate of Return WeCare Clinic is planning on investing in some new echocardiogram equipment that will
Question:
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Accounting Rate of Return
WeCare Clinic is planning on investing in some new echocardiogram equipment that will require an initial outlay of $175,000. 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: $89,000, $78,000, $92,000, $88,000, and $93,000.
Required:
1. Calculate the annual net income for each of the five years.
Net Income Year 1 $ Year 2 $ Year 3 $ Year 4 $ Year 5 $ 2. Calculate the accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16").
%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): $93,000, $93,000, $93,000, $89,000, and $36,000? Calculate its accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16").
%Using the accounting rate of return metric, which project should be selected: the first or the second?
Why might the second project be preferred over the first project?
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen