Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Question #4
Iceland Corporation Limited is considering
investing in one of two machines – A or B.
The initial cost and net cash inflows from
each project are shown below. The
opportunity cost for both projects is 10% per
cent.
Cash Flow
Machine A
Machine B
$
2$
Initial Cost
(6 000 000)
(4 500 000)
Net Cash
Inflows
1 000 000
1 300 000
1 400 000
1 600 000
Year 1
Year 2
1 600 000
1 600 000
1 200 000
Year 3
2 300 000
1 200 000
1 200 000
Year 4
Year 5
Required:
a) Calculate the ARR on initial capital for
machine A and machine B.
b) Calculate the ARR on average capital for
machine A and machine B.
Transcribed Image Text:Question #4 Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per cent. Cash Flow Machine A Machine B $ 2$ Initial Cost (6 000 000) (4 500 000) Net Cash Inflows 1 000 000 1 300 000 1 400 000 1 600 000 Year 1 Year 2 1 600 000 1 600 000 1 200 000 Year 3 2 300 000 1 200 000 1 200 000 Year 4 Year 5 Required: a) Calculate the ARR on initial capital for machine A and machine B. b) Calculate the ARR on average capital for machine A and machine B.
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