Brandon Company Is Contemplating the Purchase of a New Piece

Multiple Choice

Brandon Company is contemplating the purchase of a new piece of equipment for $45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated accounting rate of return (ARR) on this project (rounded to two decimal points) , based on the initial investment is:

A) 2.67%.
B) 3.33%.
C) 6.67%.
D) 10.00%.
E) 12.00%.