Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per cent.Cash FlowMachine AMachine B $$Initial Cost(6 000 000)(4 500 000)Net Cash Inflows Year 11 000 0001 400 000Year 21 300 0001 600 000Year 32 300 0001 600 000Year 41 200 0001 600 000Year 51 200 0001 200 000 Required:a) Calculate the ARR on initial capital for machine A and machine B. b) Calculate the ARR on average capital for machine A and machine B.

ARR is the accounting rate of return which can be calculated by dividing the average annual profit…

Answered: Iceland Corporation Limited is…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 21BEA

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Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per cent.

Cash Flow	Machine A	Machine B
	$	$
Initial Cost	(6 000 000)	(4 500 000)
Net Cash Inflows
Year 1	1 000 000	1 400 000
Year 2	1 300 000	1 600 000
Year 3	2 300 000	1 600 000
Year 4	1 200 000	1 600 000
Year 5	1 200 000	1 200 000

Required:

a) Calculate the ARR on initial capital for machine A and machine B.

b) Calculate the ARR on average capital for machine A and machine B.

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