Danny Bostic is evaluating a new ticketing system for his theater. The system wi
ID: 2509566 • Letter: D
Question
Danny Bostic is evaluating a new ticketing system for his theater. The system will cost $273,680 and will save the theater $57,850 in annual cash operating costs. Danny expects the new system to last 8 years, at which time the system will have a salvage value of $20,000. If Danny purchases the new system, he will be able to sell his existing system for $16,000. (a) Calculate the accounting rate of return for the proposed ticketing system. (Round answer to 2 decimal places, eg, 5.25% ) Accounting rate of return (b) Darry Bostic wants to earn a minimum accounting rate of return of 9% on his projects. Should he invest in the new equipment? invest in the new equipment.Explanation / Answer
1) Computation of Accounting rate of return(ARR):
ARR=ACCOUNTING PROFIT/INITIAL INVESTMENT
lets calculate each component
Incremental net Income or accounting profit=Incremental revenue-depreciation
Incremental revenue=savings in operating profit each year = $57,850
Depriciation per year =(value of asset-salvage value)/ueful life of asset
=($273,680-$20,000)/8=$31,710
therefore profit=$57,850-$31,710=$26,140
Amount of Initial Investment=Value of New Asset(ticketing system)-Sale value of existing asset
=$273,680-$16,000=$257,680
The amount of initial investment has been reduced by net realisable value of old machine
ARR=$26,140/$257,680=10%
2)The new ticketing system is providing 10% rate of return for the firm , which is more than the expected rate of return by Danny Bostic of 9% .Hence he SHOULD invest in new ticketing system
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