Transport design is shopping for new equipment. managers are considering 2 inves

Question

Transport design is shopping for new equipment. managers are considering 2 investments. equipment manufactured by Rouse, Inc., costs $1,020,000 and will last for 5 years, no residual value, annual operating income = $265,000. equipment manufactured by Vargas, Co. costs $1,240,000, remain useful for 6 years, annual operating income $230,000, expected residual value=$100,000.

Which equipment offers the higher ARR?

**tried to calculate it, I got Rouse, Inc. and it's correct but my calculation is way off..

Explanation / Answer

For Rouse: Average proft/average investment = 265,000/(1,020,000/2) = .5196 or 51.96% For Vargas: Average profit/average investment = 230,000/((1,240,000 + 100,000)/2) = .3433 or 34.33% Rouse at 51.96%

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