ABC is considering investing in two machines; Machine A and Machine B with initial investments of $4,000,000 and $5,000,000 respectively. Each project is expected to have a life of five (5) years. The after tax profits generated by the projects are as follows: Machine A Machine B After tax profits $ $ Year 1 1 000 000 1 400 000 Year 2 1 200 000 1 500 000 Year 3 1 300 000 1 600 000 Year 4 1 200 000 1 400 000 Year 5 1 000 000 1 200 000 Required: Calculate the accounting rate of return (ARR) on initial capital.
ABC is considering investing in two machines; Machine A and Machine B with initial investments of $4,000,000 and $5,000,000 respectively. Each project is expected to have a life of five (5) years. The after tax profits generated by the projects are as follows: Machine A Machine B After tax profits $ $ Year 1 1 000 000 1 400 000 Year 2 1 200 000 1 500 000 Year 3 1 300 000 1 600 000 Year 4 1 200 000 1 400 000 Year 5 1 000 000 1 200 000 Required: Calculate the accounting rate of return (ARR) on initial capital.
Chapter11: Capital Budgeting Decisions
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ABC is considering investing in two machines; Machine A and Machine B with initial investments of $4,000,000 and $5,000,000 respectively. Each project is expected to have a life of five (5) years. The after tax profits generated by the projects are as follows:
|
Machine A |
Machine B |
After tax profits |
$ |
$ |
Year 1 |
1 000 000 |
1 400 000 |
Year 2 |
1 200 000 |
1 500 000 |
Year 3 |
1 300 000 |
1 600 000 |
Year 4 |
1 200 000 |
1 400 000 |
Year 5 |
1 000 000 |
1 200 000 |
Required:
- Calculate the accounting
rate of return (ARR) on initial capital.
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