Bill Joyner is evaluating a new ticketing system for his theater. The system wil
ID: 2483810 • Letter: B
Question
Bill Joyner is evaluating a new ticketing system for his theater. The system will cost $366,200 and will save the theater $57,600 in annual cash operating costs. Bill expects the new system to last 10 years, at which time the system will have a salvage value of $25,000. If Bill purchases the new system, he will be able to sell his existing system for $14,000.
(a) Calculate the accounting rate of return for the proposed ticketing system
(b) Bill Joyner wants to earn a minimum accounting rate of return of 6% on his projects. Should he invest in the new equipment?
Explanation / Answer
Initial investment = $366200 - sales vale of the existing system = $366200 - $14000 = $352200
Salvage value = $25000
Average investment = ($352200 + $25000) / 2 = $188600
Depreciation = (366200 - 25000) / 10 =$34120
Annual cash flow from cash operating cost savings = $57600
Increase in annual net income = cash cost savings - depreciation = $57600 - $34120 = $23480
Accounting rate of return
= Average annual net income from the machine / average investment
= $23480 / $188600
= 12.45%
b)
As the accounting rate of return from the new machine is more than 6%, Bill should invest in new machine.
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