Answered: Using the Accounting Rate of Return…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

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Erman is planning to construct a Squash Sport Arena on which has 50 courts to be used at any point of time. The usage of the courts is expected to be 100%.

The initial investment cost for the sport arena is MYR600,000. It is expected to generate revenue MYR3,000 per court in year 1 and 10% increase for every year from year 2 to 6.

The operating cost per generator is MYR1,000 and expected to increase by 10% every year from year 2 to 6. At year 6 it can cease the operation by selling the entire business for MYR400,000. The cost of capital is expected to be about 12%.

Using the Accounting Rate of Return (AROR) methods, should the project is acceptable or rejected?.

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