Gomez Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal Y?

Question

Gomez Corporation is considering two alternative investment proposals with the following data:  What is the accounting rate of return for Proposal Y?

Quizplus · Accepted Answer

Accounting rate of return (ARR) is calculated by dividing the average annual profit by the initial investment and then multiplying it by 100.

For Proposal Y, 
ARR = (Average annual profit/Initial Investment) x 100 
= (($59,000 + $58,000 + $57,000)/3)/$900,000 x 100 
= $174,000/$900,000 x 100 
= 19.33%

Since the required rate of return is 15%, Proposal Y exceeds the required rate of return with ARR of 19.33%. Therefore, Proposal Y is the best choice.

Gomez Corporation Is Considering Two Alternative Investment Proposals with the Following