O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $3,000,000. The following information is available: The accounting rate of return for the Kentucky proposal is closest to (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

Question

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $3,000,000. The following information is available:  The accounting rate of return for the Kentucky proposal is closest to (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

Quizplus · Accepted Answer

To calculate the accounting rate of return, we need to divide the average annual accounting profit by the initial investment, and then express the result as a percentage.

For the Indiana proposal: 
- Initial investment = $1,920,000
- Annual accounting profit = $360,000 (derived from the table)
- Average annual accounting profit = $360,000 / 5 = $72,000
- Accounting rate of return = $72,000 / $1,920,000 = 0.0375 or 3.75%

For the Kentucky proposal: 
- Initial investment = $3,000,000 
- Annual accounting profit = $540,000 (derived from the table) 
- Average annual accounting profit = $540,000 / 6 = $90,000 
- Accounting rate of return = $90,000 / $3,000,000 = 0.03 or 3%

Therefore, the accounting rate of return for the Kentucky proposal is 3%, which is much lower than the rate of return for the Indiana proposal. Thus, opening 5 stores in Indiana is the better choice for O'Mally Department Stores.

O'Mally Department Stores Is Considering Two Possible Expansion Plans