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6 August, 03:41

Beacon company is considering automating its production facility. the initial investment in automation would be $15 million, and the equipment has a useful life of 10 years with a residual value of $500,000. the company will use straight-line depreciation. beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit. determine the project's accounting rate of return

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  1. 6 August, 05:04
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    Additional Information:

    Net Operating Income before investment $1,710,000

    Net Operating Income After investment $2,690,000

    Answer:

    12.65%

    Explanation:

    Now the project's accounting rate of return can be calculated using the following formula:

    Accounting rate of return = Average Project Net Income / Avg. Investment

    Here

    Average Project Net Income is $980,000 per year (Step1)

    and

    Average investment is $7,750,000 (Step2)

    By putting values, we have:

    Accounting rate of return = $980,000 / $7,750,000 = 12.65%

    Step1: Average Project Net Income

    The relevant cash generated due to additional sales is the difference of the net operating income before investment and after investment, which is:

    Investment Profit per year = $2,690,000 - $1,710,000 = $980,000 per year

    Step2: Average Investment

    Average Investment = (Initial Investment + Residual Value) / 2

    Here

    Initial Investment is $15 million

    and

    Residual Value is $0.5 million

    So by putting values, we have:

    Average Investment = ($15 million + $0.5 Million) / 2 = $7.75 million
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