Final answer:
The Accounting Rate of Return (ARR) for the proposed investment in two hot air balloons by BBS is approximately 2.04%.
Step-by-step explanation:
The Accounting Rate of Return (ARR) is a financial metric used to evaluate the profitability of an investment. It measures the average annual profit generated by the investment as a percentage of the initial investment.
To calculate the ARR, we need to follow these steps:
1. Calculate the average annual profit:
Average Annual Profit = (Annual Net Income Generated) / (Useful Life)
In this case, the annual net income generated is $37,800 and the useful life is 10 years.
Average Annual Profit = $37,800 / 10 = $3,780
2. Calculate the average investment:
Average Investment = (Initial Investment - Salvage Value) / 2
In this case, the initial investment is $420,000 and the salvage value is $50,000.
Average Investment = ($420,000 - $50,000) / 2 = $185,000
3. Calculate the Accounting Rate of Return (ARR):
ARR = (Average Annual Profit) / (Average Investment) * 100
Substituting the values, we have:
ARR = $3,780 / $185,000 * 100 ≈ 2.04%
Therefore, the Accounting Rate of Return (ARR) for the proposed investment in two hot air balloons by BBS is approximately 2.04%.
Your question is incomplete, but most probably the full question was:
Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows:
Initial investment (for two hot air balloons) $ 420,000
Useful life 10 years
Salvage value $ 50,000
Annual net income generated $ 37,800
BBS’s cost of capital 11 %
Assume straight line depreciation method is used. Required: Help BBS evaluate this project by calculating Accounting rate of return.