You own a furniture manufacturing company. You are looking to expand into glass furniture and need to buy new manufacturing equipment to manufacture this type of furniture. You have researched many suppliers but have found that two machines will best suit your needs.  The cost of machine 1 is $90,000, and the cost of machine 2 is $110,000. The estimated net profits the machines will generate are in the following table:Net ProfitMachine 1 (cost $90,000)Machine 2 (cost $110,000)Year 1$20,000$10,000Year 2$30,000$20,000Year 3$40,000$40,000Year 4$20,000$60,000Year 5$20,000$50,000Total$130,000$180,000 Compare the ARR for both machines and decide which machine you should buy. [Note: you are supposed to show every step of your calculation and interpret the result.] Critically evaluate the ARR technique in evaluating investment options. [Note: remember to use Harvard referencing to reference your sources]

Question
Asked Nov 22, 2019
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You own a furniture manufacturing company. You are looking to expand into glass furniture and need to buy new manufacturing equipment to manufacture this type of furniture. You have researched many suppliers but have found that two machines will best suit your needs.  The cost of machine 1 is $90,000, and the cost of machine 2 is $110,000. The estimated net profits the machines will generate are in the following table:

Net Profit

Machine 1 (cost $90,000)

Machine 2 (cost $110,000)

Year 1

$20,000

$10,000

Year 2

$30,000

$20,000

Year 3

$40,000

$40,000

Year 4

$20,000

$60,000

Year 5

$20,000

$50,000

Total

$130,000

$180,000

 

  1. Compare the ARR for both machines and decide which machine you should buy. [Note: you are supposed to show every step of your calculation and interpret the result.]

 

  1. Critically evaluate the ARR technique in evaluating investment options. [Note: remember to use Harvard referencing to reference your sources]
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Expert Answer

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Step 1

ARR refers to accounting rate of return, it is the percentage return on a project with respect to its initial cash outflow or investment.

Step 2

ARR is calculated as average net profit divided by average investment.
Using the cashflows given, we can determine the ARR as follows:

Step 3
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B C Machine 1 Machine 2 1 Year 2 1 20000 10000 3 2 30000 20000 4 40000 40000 5 4 20000 60000 6 5 20000 50000 Average net profit= 7 26000 36000 8 Initial investment= 90000 110000 28.89% 32.73% 9 ARR= A co LO LO

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