Liv Enterprise is considering a national launch of 2 corn chip products under project A and B. The National launch will require the following:Additional manufacturing equipment; Project A: K900, 000.00 and Project B: K1, 000,000.00 Upgrading Existing Facilities; Project A: K100, 000.00 and Project B: K400,000.00 Both of the above would be paid for at the outset and would be depreciated in the accounts over a five year period using straight line with a residual value of for both for Project A and B of zero.Projected revenues and costs over a period of five years are given in table below:Project AYear Revenue Costs1 K1,200,000.00 K1,340,000.002 K2,000,000.00 K1,670,000.003 K2,000,000.00 K1,520,000.004 K2,250,000.00 K1,685,000.005 K2,250,000.00 K1,685,000.00 Project B Year Revenue Costs1 K1,300,000.00 K1,460,000.002 K2,100,000.00 K1,520,000.003 K2,200,000.00 K1,400,000.004 K2,400,000.00 K1,600,000.005 K2,500,000.00 K1,720,000.00i) Appraise the two projects through the use of Accounting Rate of Return andsuggest which of the two offers a better option. Please note that the abovecosts do not include depreciation.
Liv Enterprise is considering a national launch of 2 corn chip products under project A and B. The National launch will require the following:
Additional manufacturing equipment; Project A: K900, 000.00 and Project B: K1, 000,000.00 Upgrading Existing Facilities; Project A: K100, 000.00 and Project B: K400,000.00 Both of the above would be paid for at the outset and would be depreciated in the accounts over a five year period using straight line with a residual value of for both for Project A and B of zero.
Projected revenues and costs over a period of five years are given in table below:
Project A
Year Revenue Costs
1 K1,200,000.00 K1,340,000.00
2 K2,000,000.00 K1,670,000.00
3 K2,000,000.00 K1,520,000.00
4 K2,250,000.00 K1,685,000.00
5 K2,250,000.00 K1,685,000.00
Project B
Year Revenue Costs
1 K1,300,000.00 K1,460,000.00
2 K2,100,000.00 K1,520,000.00
3 K2,200,000.00 K1,400,000.00
4 K2,400,000.00 K1,600,000.00
5 K2,500,000.00 K1,720,000.00
i) Appraise the two projects through the use of Accounting
suggest which of the two offers a better option. Please note that the above
costs do not include depreciation.
Accounting rate of return (ARR) refers to the share rate of return which is predicted from an investment or asset comparing it to the initial cost of investment. So, it is basically used to make capital budgeting decisions.etc.
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