Comfort Golf Products is considering whether to upgrade its equipment. Managers

Question

Comfort Golf Products is considering whether to upgrade its equipment. Managers are considering two options. Equipment manufactured by Richland Inc. costs $800,000 and will last five years and have no residual value. The Richland equipment will generate annual operating income of $156,000. Equipment manufactured by Lakeshore Limited costs $1,250,000 and will remain useful for six years. It promises annual operating income of $237,500, and its expected residual value is $105,000 Which equipment offers the higher ARR? First, enter the formula, then calculate the ARR (Accounting Rate of Return) for both pieces of equipment. (Enter the answer as a percent rounded to the nearest tenth percent.) Average annual operating income from asset nitial investment - rate of return Richland 800,000 Enter any number in the edit fields and then click Check Answer parts remaining Clear All Check Answer

Explanation / Answer

Accounting rate of return :

Richland equipment give higher ARR.

Annual operating income / Initial investment = Accounting rate of return Richland 156000 / 800000 = 19.50% Lackshore 237500 / 1250000 = 19%

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