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The Silverside Company is considering investing in two alternative​ projects: Project 1 Project 2 Investment ​$500,000 ​$260,000 Useful life​ (years) 8 8 Estimated annual net cash inflows for useful life ​$110,000 ​$45,000 Residual value ​$32,000 ​$16,000 Depreciation method Straightminusline Straightminusline Required rate of return ​12% ​10% What is the accounting rate of return for Project​ 1?

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Answer:

Rate of return for Project 1 ​ is -2,43%

Explanation:

We use excel or a spreadsheet to calculate this ratio. See document attached.

We use a cash flow to solve this problem.

At moment 0 we have the investment cost , in this case $500,000 . From period 1 to period 8, we have incomes o benefits of $110,000. Residual value ​$32,000 at moment 8.

Depreciation is ($500,000- $32,000)/ 8 = 58500

Then, we calculate the Net cash flow that is the difference between benefits and cost.

We use all the result (positive and negative) in Net cash flow to get the IRR.  

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