Problem
Dairy Ice wants to purchase a new ice cream truck which costs $56,000. The company has a cost of capital of 8%, required rate of return of 10%, and the prevailing income tax rate is 30%. The acquisition is proposed for January 1, 2021. Dairy Ice expects it can sell the truck for $8,000 at end of its useful life of 4 years. Dairy Ice predicts the new truck will generate net income of $5,000 and operating cash flows of $17,000 during 2021, with an increase of 5% each subsequent year. What is the accounting rate of return?