Question

Tiberius Manufacturing is considering two alternative investment proposals with the following​ data: Proposal X Proposal Y Investment $ 11 comma 600 comma 000 $ 480 comma 000 Useful life 5 years 5 years Estimated annual net cash inflows for 5 years $ 2 comma 320 comma 000 $ 95 comma 000 Residual value $ 54 comma 000 $ 24 comma 000 Depreciation method Straightminusline Straightminusline Required rate of return 14​% 14​% Calculate the accounting rate of return for Proposal Y.​ (Round any intermediate calculations and your final answer to two decimal​ places.)

Answer 1

Answer:

1.51%

Explanation:

The computation of the accounting rate of return is shown below:

Accounting rate of return = Average annual profit ÷ average investment

where,

Average annual profit is

= Estimated annual net cash inflows for 5 years - annual depreciation

= $95,000 - ($480,000 - $24,000) ÷ 5 years

= $95,000 - $91,200

= $3,800

And, the average annual investment is

= (Initial Investment + Scrap Value) ÷ 2

= ($480,000 + $24,000) ÷ 2

= $252,000

Now placing these values to the above formula

So, the accounting rate of return is

= $3,800 ÷ $252,000

= 1.51%