Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts

Initial investment $400,000 $600,000

Annual net income 30,000 46,000

Net annual cash inflow 110,000 146,000

Estimated useful life 5 years 6 years

Salvage value - 0 - - 0-

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The annual rate of return for Project Soup is

7.5%.

27.5%.

55%.

15.0%.

Question

Cynthia Duncan

Business

18 June, 16:14

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts

Initial investment $400,000 $600,000

Annual net income 30,000 46,000

Net annual cash inflow 110,000 146,000

Estimated useful life 5 years 6 years

Salvage value - 0 - - 0-

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The annual rate of return for Project Soup is

7.5%.

27.5%.

55%.

15.0%.

+5

Answers (1)

Know the Answer?

Alexzander Lamb · Answer 1

15.0%.

Explanation:

The formula to compute the annual rate of return is shown below:

= Annual net income : average investment

where,

Annual net income is $30,000

And, the average investment would be

= (Initial investment + salvage value) : 2

= ($400,000 + $0) : 2

= $400,000 : 2

= $200,000

Now put these values to the above formula

So, the rate would equal to

= $30,000 : $200,000

= 15%