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What would be the decision of the company

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Question - 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

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)?

Average Profit =

Average investment =

ARR =

Recommendation? Why?

Reference no: EM132850644

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