Suppose Whole Foods is considering investing in warehouse-management software that costs $900,000, has $40,000 residual value and should lead to cash cost savings of $170,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation's denominator?

Question

Quizplus · Accepted Answer

ARR (Accounting Rate of Return) is calculated by taking the average annual income from the investment as a percentage of the initial investment. In this case, the initial cost of the investment (i.e., the denominator) is $900,000, and this figure should be used to calculate the ARR. The residual value of $40,000 is not relevant to this calculation. The cash cost savings of $170,000 per year is used to determine the numerator of the equation (i.e., the annual income). Therefore, the correct answer is B.

Suppose Whole Foods Is Considering Investing in Warehouse-Management Software That