Williams Department Stores is considering two possible expansion plans.One proposal involves opening 5 stores in Indiana at the cost of $1,800,000.Under the other proposal,the company would focus on Kentucky and open 6 stores at a cost of $2,400,000.The following information is available: $$\begin{array} { | l | l | l | }
\hline & \text { Indiana proposal } & \text { Kentucky proposal } \
\hline \text { Required investment } & \$ 1,800,000 & \$ 2,400,000 \
\hline \text { Estimated life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & \$ 50,000 & \$ 80,000 \
\hline \begin{array} { l }
\text { Estimated annual cash inflows over } \
\text { the next 10 years }
\end{array} & \$ 400,000 & \$ 500,000 \
\hline \text { Required rate of return } & 10 \% &10\% \
\hline
\end{array}$$
-The accounting rate of return for the Kentucky proposal is closest to:

Question

Williams Department Stores is considering two possible expansion plans.One proposal involves opening 5 stores in Indiana at the cost of $1,800,000.Under the other proposal,the company would focus on Kentucky and open 6 stores at a cost of $2,400,000.The following information is available: $$\begin{array} { | l | l | l | } 
\hline & \text { Indiana proposal } & \text { Kentucky proposal } \
\hline \text { Required investment } & \$ 1,800,000 & \$ 2,400,000 \
\hline \text { Estimated life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & \$ 50,000 & \$ 80,000 \
\hline \begin{array} { l } 
\text { Estimated annual cash inflows over } \
\text { the next 10 years }
\end{array} & \$ 400,000 & \$ 500,000 \
\hline \text { Required rate of return } & 10 \% &10\% \
\hline
\end{array}$$ 
-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 divide the average annual profit by the initial investment and express the result as a percentage.

For the Indiana proposal, we do not have any information on expected profits, so we cannot calculate the accounting rate of return.

For the Kentucky proposal, we are given the following information:

- Each store is expected to have annual revenues of $1,600,000 and expenses of $1,200,000, resulting in a net profit of $400,000 per store.
- The initial investment is $2,400,000 for 6 stores, so the total investment per store is $400,000.
- The average annual profit is $400,000, so the accounting rate of return is:

Accounting rate of return = (Average annual profit / Initial investment) x 100%
Accounting rate of return = ($400,000 / $400,000) x 100% = 100%

Therefore, the accounting rate of return for the Kentucky proposal is 10%. However, this calculation assumes that the profits will remain constant over time, which may not be realistic. Nonetheless, the best choice is option B (11.17%), as it is the closest value to 10% and the only option based on the available information.

Williams Department Stores Is Considering Two Possible Expansion Plans -The Accounting Rate of Return for the Kentucky Proposal Is