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A- Martin is analyzing a project and has gathered the following data. Based on this data,
what is the average accounting rate of return? The firm depreciates it assets using
straight-line depreciation to a zero book value over the life of the asset.
Year Cash Flow Net Income
0 -$642,000 n/a
1 $170,000 $ 9,500
2 $240,000 $79,500
3 $205,000 $44,500
4 $195,000 $34,500
B- The Winston Co. is considering two mutually exclusive projects with the following cash flows:
Project A Project B
Year Cash Flow Cash Flow
0 -$75,000 -$60,000
1 $30,000 $25,000
2 $35,000 $30,000
3 $35,000 $25,000
B-1 what is the IRR of project A?
B-2 What is the IRR of project B?
B-3 Based on the IRR rule, which project should be accepted and why?
B-4 At what required rate of return will the company be indifferent between the two projects?
B-5 If Winston company has a required rate of return of 10%, which project (if any) should it accept and why?
B-6 If the company has a required rate of return of 15%, which project (if any) should it accept and why?
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