Managerial Accounting
Managerial Accounting
3rd Edition
ISBN: 9780077826482
Author: Stacey M Whitecotton Associate Professor, Robert Libby, Fred Phillips Associate Professor
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 3.1GBP
To determine

Concept introduction:

Accounting rate of return: It is a rate at which a company can earn profit on the amount invested initially. It is calculated by dividing the average inflow with the initial cost of the project.

To calculate:

Accounting rate of return.

Expert Solution & Answer
Check Mark

Answer to Problem 3.1GBP

Project 1: ARR=25 %

Project 2: ARR=20.12 %

Project3: ARR=13 %

It is better to accept project 1.

Explanation of Solution

Accounting rate of return for each project is calculated as follows:

Project-1:

Accounting rate of return = Average net Income* 100/ Initial Outflow

= (975000 - (2700000-600000)/7) *100/ 2700000

= (975000 - 300000)* 100/ 2700000

= 25%

Average Net Income = Cash Inflow - Depreciation

Depreciation = 2700000-600000)/7 = 300000

Project-2:

Accounting Rate of return= Average cash inflow * 100/ Initial Outflow                                          = 1650000 *100/ 8200000                                          = 20.12 %

Project-3:

Accounting Rate of return= Average cash inflow * 100/ Initial Outflow                                          = ( 30000*10+ 2500*10)/ 10 * 100/ 25000*10                                          = 32500* 100/ 250000                                          = 13 %

As per accounting rate of return, it is better to accept project 1 because it has the highest ARR.

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Chapter 11 Solutions

Managerial Accounting

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