Tiberius Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | l | l | }
\hline & \text { Proposal } X & \text { Proposal Y } \
\hline \text { Investment } & \$ 10,500,000 & \$ 500,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,100,000 & \$ 105,000 \
\hline \text { Residual value } & \$ 52,000 & \$ 32,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 13 \% & 12 \% \
\hline
\end{array}$$ Calculate the accounting rate of return for Proposal Y.(Round any intermediate calculations and your final answer to two decimal places.)

Question

Tiberius Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | l | l | } 
\hline & \text { Proposal } X & \text { Proposal Y } \
\hline \text { Investment } & \$ 10,500,000 & \$ 500,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,100,000 & \$ 105,000 \
\hline \text { Residual value } & \$ 52,000 & \$ 32,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 13 \% & 12 \% \
\hline
\end{array}$$ Calculate the accounting rate of return for Proposal Y.(Round any intermediate calculations and your final answer to two decimal places.)

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual net income divided by the average investment. The average annual net income is the sum of the annual net cash inflows divided by the number of years. The average investment is the initial investment plus the residual value divided by 2.For Proposal Y, the average annual net income is ($105,000 + $105,000 + $105,000 + $105,000 + $105,000) / 5 = $105,000. The average investment is ($500,000 + $32,000) / 2 = $266,000. Therefore, the ARR for Proposal Y is $105,000 / $266,000 = 0.3948, or 39.48%.

Tiberius Manufacturing Is Considering Two Alternative Investment Proposals with the Following