(L. OBJ. 2) Using the payback and accounting rate of return methods to make capital investment decisions [10—15 min]
Transport Design is shopping for new equipment. Managers are considering two investments. Equipment manufactured by Rouse, Inc., costs $1,020,000 and will last for five years, with no residual value. The Rouse equipment will generate annual operating income of $265,000. Equipment manufactured by Vargas Co. costs $1,240,000 and will remain useful for six years. It estimates annual operating income of $230,000, and its expected residual value is $100,000.
Requirement
1. Which equipment offers the higher ARR?
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