You have the following information about three electronic sales registers that a

Question

You have the following information about three electronic sales registers that are in the market. The owner of a restaurant asks for your help in deciding which of the three machines to buy. Register A Register B Register C Cash investment required

$6,300 $6,000 $6,700 Estimated machine life 5 Years 5 Years 5 Years Estimated residual trade-in value (at the end of 5 years) $ 500 -0- $ 300 Annual operating costs $ 400 $ 300 $ 300 (excluding depreciation) Annual savings before deduction of costs $2,000 $2,000 $2,000 Income tax rate is 30 percent. Assume straight-line depreciation. a. Use the ARR method to decide which of the three machines would be the best investment.

. If the restaurant owner wanted a return on investment of at least 10 percent, what would you advise?

P12.2 Using the information provided in Problem 12.1, which would be the best investment using the payback period method? If the owner wanted her cash back in less than four years, should she invest in any of the machines?

Explanation / Answer

Register A

Accounting rate of return= average accounting return/ intial investment

average accounting income = annual inflow - depreciation

Depreciation= (6300-500)/5= 1160

average accounting income =2000-1160= 840

acconting rate of return= (840/6300)*100=13.33

Register B

Depreciation=(6000-0)/5=1200

average accounting income= 2000-1200=800

acconting rate of return=(800/6000)*100=13.33

Register C

Depreciation=(6700-300)/5=1280

average accounting return=2000-1280=720

Accounting rate of return=(720/6700)*100=10.74

conclusion: Register A either B is the best to invest

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