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 $2,500,000. The following information is available: The accounting rate of return for the Kentucky proposal is closest to

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 $2,500,000. The following information is available:  The accounting rate of return for the Kentucky proposal is closest to

Quizplus · Accepted Answer

To calculate the accounting rate of return, we need to first calculate the average annual income generated by each proposal.

For the Indiana proposal, the total annual income expected is $480,000 (5 stores x $96,000 per store).

For the Kentucky proposal, the total annual income expected is $900,000 (6 stores x $150,000 per store).

Next, we calculate the average investment for each proposal.

For the Indiana proposal, the average investment is $384,000 ($1,920,000 / 5 stores).

For the Kentucky proposal, the average investment is $416,667 ($2,500,000 / 6 stores).

Now we can plug the numbers into the accounting rate of return formula:

Accounting Rate of Return = Average Annual Income / Average Investment

For the Indiana proposal:

ARR = $480,000 / $384,000 = 1.25 or 125%

For the Kentucky proposal:

ARR = $900,000 / $416,667 = 2.16 or 216%

Based on the accounting rate of return alone, the Kentucky proposal appears to be the better choice. However, it's important to consider other factors such as market demand and competition before making a final decision.

O'Mally Department Stores Is Considering Two Possible Expansion Plans