All scenarios are independent of all other scenarios. Assume that all cash flows are after-tax cash flows. Kambry Day is considering investing in one of the following two projects. Either project will require an investment of $20,000. The expected cash flows for the two projects follow. Assume that each project is depreciable.
Year Project A Project B
1 $ 6,000 $ 6,000
2 8,000 8,000
3 10,000 10,000
4 10,000 3,000
5 10,000 3,000
Wilma Golding is retiring and has the option to take her retirement as a lump sum of $450,000 or to receive $30,000 per year for 20 years. Wilma's required rate of return is 6%.
David Booth is interested in investing in some tools and equipment so that he can do independent drywalling. The cost of the tools and equipment is $30,000. He estimates that the return from owning his own equipment will be $9,000 per year. The tools and equipment will last 6 years.
Patsy Folson is evaluating what appears to be an attractive opportunity. She is currently the owner of a small manufacturing company and has the opportunity to acquire another small company's equipment that would provide production of a part currently purchased externally. She estimates that the savings from internal production will be $75,000 per year. She estimates that the equipment will last 10 years. The owner is asking $400,000 for the equipment. Her company's cost of capital is 8%.
Conceptual Connection: Which of Kambry's projects should be chosen based on the ARR? If required, round to the nearest percent.
Accounting rate of return (ARR):
Project A: ARR %_ _ _
Project B: ARR %_ _ _