Calculate the accounting rate of return

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Reference no: EM132319245

Question :

Philly has been offered a music store franchise for a fee of $400,000. The franchise would have a life of 5 years at which its value would be nil. Budgeted Operating information is as follows:

Year

Sales

Expenses

Depreciation

1

$250,000

$45,000

$50,000

2

$235,000

$42,500

$50,000

3

$187,500

$54,000

$40,000

4

$150,000

$50,000

$40,000

5

$120,000

$42,500

$40,000

The minimum after tax rate of return is io%. The tax rate is 27.5% of net income.

Required: Calculate the following:

(a) Payback Period

(b) Accounting Rate of Return (Initial Investment)

(c) NPV of the project

d) Compare short & long term financial outcomes and projections with estimated Cash Flows from the franchise and recommend if the project should be accepted.

Reference no: EM132319245

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