Summit Ltd is considering an investment project that is expected to cost Sh 500,000 with a scrap value of Sh100, 000 after its 5 years economic life. The project is expected to generate the following cash flows before depreciation and tax.

YEAR

Earnings Before Interest and Tax (EBIT) SHS

1

100,000

2

120,000

3

140,000

4

160,000

5

200,000



(i)The applicable tax rate is 30% and depreciation is charged on a straight line.

(ii) Assume a discount rate of 15%

Calculate;

Average Rate of Return
Question 4Answer

a.
17.9%


b.
18%


c.
9%


d.
12%