Santos Products is considering whether to upgrade its manufacturing equipment. M

Question

Santos Products is considering whether to upgrade its manufacturing equipment. Managers are considering two options. Equipment manufactured by Swanson costs $1,100,000 and will last for four years with no residual value. The Swanson equipment will generate annual operating income for $170,500. Equipment manufactured by Poindexter costs $1,375,000 and will remain useful for five years. It promises annual operating income of $247,500, and its expected residual value is $115,000. Which equipment offers the higher ARR?

Explanation / Answer

Accounting rate of return = Average Accounting Income / Average Investment

Equipment manufactured by Swanson

Annual depreciation = 1100000/4 = $ 275000

Average accounting income = $ 170500 - $ 275000 = -$ 104500

Accounting rate of return = -$ 104500 / 1100000 = -9.5%

Equipment manufactured by Pointdexter

Annual Depreciation = ($1375000 - 115000)/5 = $ 252000

Average Accounting Income = $ 247500 - $252000 = -$ 4500

Accounting rate of return = -$4500 / 1375000 = -0.33 %

Equipment manufactured by Pointdexter offers the -0.33% ARR

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.