Question

Juniper Corporation is considering two alternative investment proposals with the following data: Proposal X Investment $850,000 Useful life 9 years Estimated annual net cash inflows for 9 years $150,000 Residual value $79,000 Depreciation method Straight-line Required rate of return 17% Proposal Y $501,000 9 years $87,000 $- Straight - line 8% What is the accounting rate of return for Proposal X? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, XXX%.) O A. 17.65% OB. 6.54% O C. 6.25% OD. 7.57%

Answer 1

The accounting rate of return (ARR) for Proposal X is calculated by subtracting the average annual depreciation from the estimated annual net cash inflows and dividing by the initial investment. The ARR for Proposal X is 7.57%.

Step-by-step explanation:

The accounting rate of return (ARR) for Proposal X can be calculated using the formula:

ARR = (Average Annual Profit / Initial Investment) × 100%

To find the average annual profit, we need to subtract the average annual depreciation from the estimated annual net cash inflows:

Average Annual Depreciation = (Investment - Residual Value) / Useful Life

Average Annual Depreciation for Proposal X = ($850,000 - $79,000) / 9 years = $85,667 (rounded to the nearest dollar).

Average Annual Profit = Estimated Annual Net Cash Inflows - Average Annual Depreciation

Average Annual Profit for Proposal X = $150,000 - $85,667 = $64,333 (rounded to the nearest dollar).

Now we can calculate the ARR for Proposal X:

ARR for Proposal X = ($64,333 / $850,000) × 100% = 7.57% (rounded to the nearest hundredth of a percent).

The accounting rate of return for Proposal X is 7.57%.