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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Identify error in capital investment analysis calculations

 Artscape Inc. is considering the purchase of automated machinery that is expected to have a useful life of five years and no residual value. The average rate of return on the average investment has been computed to be 20%, and the cash payback period was computed to be 5.5 years.

 Do you see any reason to question the validity of the data presented? Explain.

To determine

Capital investment analysis:

Capital investment analysis is the process by which management plans, evaluates, and controls investments in fixed assets.

Errors:

An error is a mistake committed in the process of book-keeping or in accounting.  In some cases, errors may occur but, they will not affect the totals of the trial balance. Such an error can be found while preparing the trial balance or would be indicated by the unusual account balance.

To identify: The errors in the capital investment analysis methods.

Explanation

In the average rate of return method:

Computed average rate of return of automated machinery is 20% for 5 years useful life. In this case, no error is found, because A Incorporation gets 20% return for its 100% cost of investment. It verifies based on the following calculation:

Average rate of return = Percentage of cost of investmentUseful life of years=

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