What would be the decision of company regarding investment

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The manager of K&K Ltd is considering a new investment opportunity at the end of December 2020. The company has two independent divisions: Division A and Division B. Any of these divisions can take responsibility for this investment opportunity. The company's cost of capital is 15%, which is the required rate of return for the company. The company has a required pay-back period of maximum 2.5 years.

  • The total investment of Division A is $940,000 and Division B is $640,000. The estimated divisional margin for 2021 (without considering the investment opportunity) of Division A is $300,800 and for Division B is $166,400.

The required investment to take this opportunity is $110,000, useful life is 4 years and residual value at the end of the useful life is $30,000. The net cash flows estimated from this investment are as follows (assume depreciation is the only non-cash expense):

Net cash flows year 2021 50,000
Net cash flows year 2022 40,000
Net cash flows year 2023 35,000
Net cash flows year 2024 25,000

Required:

Problem 1. Based on the Accounting Rate of Return (ARR) method, what would be the decision of the company regarding the investment (round to two decimal places)?

Reference no: EM132832835

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