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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Average rate of return method, net present value method, and analysis

The capital investment committee of Overnight Express Inc. is considering two investmentprojects. The estimated income from operations and net cash flows from each investmentare as follows:

Each project requires an investment of $800.000. Straight-line depreciation will beused, and no residual value is expected. The committee has selected a r.ne of 15% forpurposes of the net present value analysis.

Instructions

1. Compute the following:

a. The average rate of return for each investment.

b. The net present value for each investment. Use the present value of Si table appearingin this chapter.

To determine

(a)

Concept introduction:

Average rate of return:

The average rate of return is the method to determine average income over the period in regard to the investment made in that period.

Net present value method:

It is a method of determining the present value of cash flows over the period by the multiplying the cash flows with the discounting factor of the required rate.

To compute:

The average rate of return for each investment.

Explanation

                O.E.

                              (Amount in $)

    ParticularsFormulaDistribution Centre ExpansionInternet Tracking Technology
    Average Income  Total IncomeUseful Life  66,000  66</

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