Part A A new project has an initial cost of $142,000. The equipment will be depreciated on...

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Part A
A new project has an initial cost of $142,000. The equipmentwill be depreciated on a straight-line basis to a book value of$45,000 at the end of the four-year life of the project. Theprojected net income each year is $14,300, $17,600, $22,400, and$14,200, respectively. What is the average accounting return?
Part B
You are evaluating two projects with the following cashflows:
Year Project X Project Y
0 ?$540,600 ?$511,000
1 219,700 209,400
2 229,600 219,200
3 236,800 227,100
4 196,500 187,900

What is the crossover rate for these two projects?
Part C
A project has the following cash flows :
Year Cash Flows
0 ?$12,300
1 5,470
2 7,900
3 5,280
4 ?1,520

Assuming the appropriate interest rate is 9 percent, what is theMIRR for this project using the discounting approach?

Answer & Explanation Solved by verified expert

4.2 Ratings (486 Votes)

a)Average Income =(14300+17600+22400+14200)/4 =17135
Depreciation =(Initial Cost-Book value)/4 =(142000-45000)/4 =24250
Average Investment =( Initial Investment+Final Book value)/2 =(142000+45000)/2 =93500

Average Accounting Return = Average Net Income/Average Book Value =17135/93500 =18.33%

b)Using Excel formula for calculating cross over rate

		A	B	C
	Year	Project X	Project Y	Difference
1	0	-540600	-511000	-29600
2	1	219,700	209,400	10300
3	2	229,600	219,200	10400
4	3	236,800	227,100	9700
5	4	196,500	187,900	8600
			Cross over rate	12.42%
			Formula	IRR(C1:C5)

cross over rate =12.42%
Alternate method Using Financial Calculator
CF0=-29600;CF1=10300;C2=10400;CF3=9700;CF5=8600 CPT IRR
IRR =12.42%

c)
FV of Cash Flows =5470*(1+9%)^3+7900*(1+9%)^2+5280*(1+9%)^1= 22224.9986
PV of Cash Flows =12300+1520/(1+9%)^4 =13376.8063

MIRR=(FV of Cash inflows/PV pf cash outflows)^(1/n)-1 =(22224.9986/13376.8063)^(1/4)-1 =13.53%

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Transcribed Image Text

Part AA new project has an initial cost of $142,000. The equipmentwill be depreciated on a straight-line basis to a book value of$45,000 at the end of the four-year life of the project. Theprojected net income each year is $14,300, $17,600, $22,400, and$14,200, respectively. What is the average accounting return?Part BYou are evaluating two projects with the following cashflows:YearProject XProject Y0?$540,600?$511,0001219,700209,4002229,600219,2003236,800227,1004196,500187,900What is the crossover rate for these two projects?Part CA project has the following cash flows :YearCash Flows0?$12,30015,47027,90035,2804?1,520Assuming the appropriate interest rate is 9 percent, what is theMIRR for this project using the discounting approach?