Tiberius Manufacturing is considering two alternative investment proposals with the following dа ta: Proposal X Proposal Y Investment $ 11 comma 600 comma 000 $ 480 comma 000 Useful life 5 years 5 years Estimated annual net cash inflows for 5 years $ 2 comma 320 comma 000 $ 95 comma 000 Residual value $ 54 comma 000 $ 24 comma 000 Depreciation method Straightminusline Straightminusline Required rate of return 14 % 14 % Calculate the accounting rate of return for Proposal Y. (Round any intermediate calculations and your final answer to two decimal places.)

Question

Business

Fiona Johnston

15 March, 02:28

Tiberius Manufacturing is considering two alternative investment proposals with the following dа ta: Proposal X Proposal Y Investment $ 11 comma 600 comma 000 $ 480 comma 000 Useful life 5 years 5 years Estimated annual net cash inflows for 5 years $ 2 comma 320 comma 000 $ 95 comma 000 Residual value $ 54 comma 000 $ 24 comma 000 Depreciation method Straightminusline Straightminusline Required rate of return 14 % 14 % Calculate the accounting rate of return for Proposal Y. (Round any intermediate calculations and your final answer to two decimal places.)

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Rory · Answer 1

1.51%

Explanation:

The computation of the accounting rate of return is shown below:

Accounting rate of return = Average annual profit : average investment

where,

Average annual profit is

= Estimated annual net cash inflows for 5 years - annual depreciation

= $95,000 - ($480,000 - $24,000) : 5 years

= $95,000 - $91,200

= $3,800

And, the average annual investment is

= (Initial Investment + Scrap Value) : 2

= ($480,000 + $24,000) : 2

= $252,000

Now placing these values to the above formula

So, the accounting rate of return is

= $3,800 : $252,000

= 1.51%