Simms Manufacturing is considering two alternative investment proposals with the following data:
$\begin{array}{|l|r|r|r|}
\hline &\text { Proposal X } & \text { Proposal Y } \
\hline \text { Investment } & \$ 620,000 & \$ 400,000 \
\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \
\hline \text { Estimated annual net cash inflows for 8 years } & \$ 130,000 & \$ 80,000 \
\hline \text { Residual value } & \$ 60,000 & \$ 0 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 14 \% & 10 \%\
\hline
\end{array}$

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What is the accounting rate of return for Proposal Y?

Question

Simms Manufacturing is considering two alternative investment proposals with the following data:
$\begin{array}{|l|r|r|r|}
\hline &\text { Proposal X } & \text { Proposal Y } \ 
\hline \text { Investment } & \$ 620,000 & \$ 400,000 \
\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \
\hline \text { Estimated annual net cash inflows for 8 years } & \$ 130,000 & \$ 80,000 \
\hline \text { Residual value } & \$ 60,000 & \$ 0 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 14 \% & 10 \%\
\hline 
\end{array}$

-
What is the accounting rate of return for Proposal Y?

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual net income by the average investment. The average annual net income is calculated by subtracting the depreciation expense from the annual net cash inflows. The average investment is calculated by dividing the initial investment by 2.For Proposal Y, the average annual net income is:($80,000 - $400,000 / 8) = $40,000The average investment is:$400,000 / 2 = $200,000Therefore, the accounting rate of return for Proposal Y is:$40,000 / $200,000 = 20%

Simms Manufacturing Is Considering Two Alternative Investment Proposals with the Following