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Calculate the accounting rate of return

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Question - A clothes manufacturing company is considering introducing a new product line. The new product line is expected to generate incremental profit for the business over the next 4 years. Financial forecasts for the new product line are as follows:

Profit after tax: Year 1 £100,000, increasing 10% a year over the 4 years.

Cost of new manufacturing machine £250,000, expected life of 4 years with a disposal value of £50,000.

Included within the profit after tax each year is £10,000 relating to central overheads. The new manufacturing line will not change the total overheads of the business.

Assume all cash flows are spread evenly throughout the year and depreciation is charged using the straight-line method.

The companies cost of capital is 10%.

Required - Calculate the Accounting rate of Return, the payback and the NPV for the new product line.

Reference no: EM133050573

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