Determine the average rate of return on investment

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Q1. June Co. is evaluating a project requiring a capital expenditure of $620,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows:

Year

Net Income

Net Cash Flow

1

$45,000

$200,000

2

85,000

240,000

3

5,000

160,000

4

15,000

170,000

 

$150,000

$770,000

The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.

a. Determine the average rate of return on investment, giving effect to depreciation on the investment.

b. Determine the net present value.

Q2. Sommers Company is evaluating a project requiring a capital expenditure of $300,000. The project has an estimated life of 5 years and no salvage value. The estimated net income and net cash flow from the project are as follows:

Year

Net Income

Net Cash Flow

1

$60,000

$120,000

2

50,000

110,000

3

45,000

105,000

4

30,000

90,000

5

20,000

80,000

 

$205,000

$505,000

The company's minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% is shown in the table below:

Year

Present Value of $1 at 12%

1

0.893

2

0.797

3

0.712

4

0.636

5

0.567

a. Determine the average rate of return on investment, giving effect to depreciation on the investment. Round your answer to two decimal places.

b. Determine the net present value.

Reference no: EM132425830

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