Alfred\'s requires discount rate of at least 14.5 percent on all fixed asset pur

Question

Alfred's requires discount rate of at least 14.5 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $15,100. This equipment will have a 5-year life and the annual cash flows from this equipment are estimated to be $6,700, $9,500, $11,900 $3,400 and $1,600. Should this purchase occur based on the accounting rate of return (ARR)? Why or why not?
A. yes; because the ARR is less than 19 percent
B. yes; because the ARR is equal to 19 percent
C. yes; because the ARR is greater than 19 percent
D. no; because the ARR is less than 19 percent
E. no; because the ARR is greater than 19 percent

Explanation / Answer

Initial Investment 15100 Year Cash flow 1 6700 2 9500 3 11900 4 3400 5 1600 Average cash flow 6620 Inititial Investment 15100 Accounting rate of return ARR = (average investment/ initial Investment)*100 43.8410596 Percent Yes C. yes; because the ARR is greater than 19 percent Initial Investment 15100 Year Cash flow 1 6700 2 9500 3 11900 4 3400 5 1600 Average cash flow 6620 Average Investment 7550 Accounting rate of return ARR = (average investment/ average Investment)*100 87.68211921 Percent Yes C. yes; because the ARR is greater than 19 percent

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